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Arbitrage and Existence of Equilibrium in Infinite Asset Markets

Listed author(s):
  • Brown, Donald
  • Werner, Jan

This paper develops a framework for a general equilibrium analysis of asset markets when the number of assets is infinite. Such markets have been studied in the context of asset pricing theories. Our main results concern the existence of an equilibrium. We show that an equilibrium exists if there is a price system under which no investor has an arbitrage opportunity. A similar result has been previously known to hold in finite asset markets. Our extension to infinite assets involves a concept of an arbitrage opportunity which is different from the one used in finite markets. An arbitrage opportunity in finite asset markets is a portfolio that guarantees non-negative payoff in every event, positive payoff in some event, and has zero price. For the case of infinite asset markets, we introduce a concept of sequential arbitrage opportunity which is a sequence of portfolios which increases an investor's utility indefinitely and has zero price in the limit. We show that a sequential arbitrage opportunity and an arbitrage portfolio are equivalent concepts in finite markets but not in their infinite counterpart.
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Paper provided by California Institute of Technology, Division of the Humanities and Social Sciences in its series Working Papers with number 825.

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Date of creation: Feb 1993
Publication status: Published:
Handle: RePEc:clt:sswopa:825
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