Arbitrage pricing theory is a finance theory that deals with how asset prices are determined. It is based on the idea that asset prices are determined by the interactions between different market participants, who each have their own view of what the “fair” price for an asset should be. The theory is used to help explain and predict movements in asset prices, and has been found to be particularly useful in the study of bond markets.

The theory is important in finance because it provides a framework for understanding how asset prices are determined. It can be used to help explain and predict movements in asset prices, and to make investment decisions.