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

Stefano Bosi (), Patrice Fontaine () and Cuong Le van
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Stefano Bosi: EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne
Patrice Fontaine: EUROFIDAI - Institut Européen de données financières - ESSEC Business School - CNRS - Centre National de la Recherche Scientifique

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

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.

Keywords: no-arbitrage; returns on financial assets; exchange rates; Law of One Price; Uncovered Interest rate Parity; general equilibrium (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-opm
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01391013v1
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Published in 2016

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Related works:
Journal Article: Interest rates parity and no arbitrage as equivalent equilibrium conditions in the international financial assets and goods markets (2016)
Working Paper: Interest rates parity and no arbitrage as equivalent equilibrium conditions in the international financial assets and goods markets (2016)
Working Paper: Interest rates parity and no arbitrage as equivalent equilibrium conditions in the international financial assets and goods markets (2016)
Working Paper: Interest rates parity and no arbitrage as equivalent equilibrium conditions in the international financial assets and goods markets (2016)
Working Paper: Interest rates parity and no arbitrage as equivalent equilibrium conditions in the international financial assets and goods markets (2016)
Working Paper: Interest rates parity and no arbitrage as equivalent equilibrium conditions in the international financial assets and goods markets (2016)
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