IDEAS home Printed from https://ideas.repec.org/p/hal/pseptp/hal-01302524.html

Interest rates parity and no arbitrage as equivalent equilibrium conditions in the international financial assets and goods markets

Author

Listed:
  • Stefano Bosi

    (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique)

  • Pascal Fontaine

    (EUROFIDAI - Institut Européen de données financières - ESSEC Business School - CNRS - Centre National de la Recherche Scientifique)

  • Cuong Le Van

    (IPAG Business School, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

In this paper, we consider a two-period consumption model with many financial assets. In the spirit of Hart, consumers purchase financial assets in period 0 and consume in period 1. We differ from Hart by considering that each agent is a country. We provide conditions for the existence of an equilibrium in both international financial assets and goods markets. First, we introduce a weaker notion of Uncovered Interest (rate) Parity (UIP) called Weak Uncovered Interest (rate) Parity (WUIP), and we show its equivalence to the no-arbitrage condition in the international financial markets. Second, we introduce the concept of common no arbitrage and we show its equivalence to UIP. These results bridge concepts of no arbitrage in general equilibrium theory and financial microeconomics and of interest parity in international financial macroeconomics. In a multi-country model with many currencies and only one good, we introduce a country-specific conversion rate which transforms the returns on assets valued in local currency into units of physical good. We the define also the exchange rates between currencies of different countries. The UIP condition is required for the existence of an equilibrium in both international financial assets and goods markets and for the existence of the Law of One Price.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Stefano Bosi & Pascal Fontaine & Cuong Le Van, 2016. "Interest rates parity and no arbitrage as equivalent equilibrium conditions in the international financial assets and goods markets," PSE-Ecole d'économie de Paris (Postprint) hal-01302524, HAL.
    • Handle: RePEc:hal:pseptp:hal-01302524
    DOI: 10.1016/j.mathsocsci.2016.04.002
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a
    for a similarly titled item that would be available.

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bosi, Stefano & Fontaine, Patrice & Le Van, Cuong, 2017. "How to determine exchange rates under risk neutrality: A note," Economics Letters, Elsevier, vol. 157(C), pages 92-96.
    2. Bosi, Stefano & Fontaine, Patrice & Le Van, Cuong, 2021. "Long-run equilibrium in international assets and goods markets: Why is the law of one price required?," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 891-904.

    More about this item

    Keywords

    ;
    ;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:pseptp:hal-01302524. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Caroline Bauer (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.