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Arbitrage, equilibrium and nonsatiation
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Allouch, Nizar, Le, Van Cuong and Page, Frank H. (2002) Arbitrage, equilibrium and nonsatiation. Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers).

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Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
Abstract
In his seminal paper on arbitrage and competitive equilibrium in unbounded exchange economies, Werner (Econometrica, 1987)proved the existence of a competitive equilibrium, under a price noarbitrage condition, without assuming either local or global nonsatiation. Werner's existence result contrasts sharply with classical existence results for bounded exchange economies which require, at minimum, global nonsatiation at rational allocations. Why do unbounded exchange economies admit existence without local or global nonsatiation? This question is the focus of our paper. We make two main contributions to the theory of arbitrage and competitive equilibrium. First, we show that, in general, in unbounded exchange economies (for example, asset exchange economies allowing short sales), even if some agents' preferences are satiated, the absence of arbitrage is sufficient for the existence of competitive equilibria, as long as each agent who is satiated has a nonempty set of useful net trades  that is, as long as agents' preferences satisfy weak nonsatiation. Second, we provide a new approach to proving existence in unbounded exchange economies. The key step in our new approach is to transform the original economy to an economy satisfying global nonsatiation such that all equilibria of the transformed economy are equilibria of the original economy. What our approach makes clear is that it is precisely the condition of weak nonsatiation  a condition considerably weaker than local or global nonsatiation  that makes possible this transformation. Moreover, as we show via examples, without weak nonsatiation, existence fails.
Item Type:  Working or Discussion Paper (Working Paper) 

Subjects:  H Social Sciences > HG Finance 
Divisions:  Faculty of Social Sciences > Economics 
Library of Congress Subject Headings (LCSH):  Arbitrage, Equilibrium (Economics), Assetbacked financing, Recessions 
Series Name:  Warwick economic research papers 
Publisher:  University of Warwick, Department of Economics 
Place of Publication:  Coventry 
Date:  January 2002 
Number:  No.637 
Number of Pages:  27 
Status:  Not Peer Reviewed 
Access rights to Published version:  Open Access 
Description:  July, 2001; current version, January, 2002 
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URI:  http://wrap.warwick.ac.uk/id/eprint/1553 
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