General Equilibrium Theory and No-Arbitrage

Emilio Barucci and Claudio Fontana
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Emilio Barucci: Politecnico di Milano
Claudio Fontana: Université Paris Diderot (Paris 7)

Chapter Chapter 4 in Financial Markets Theory, 2017, pp 123-200 from Springer

Abstract: Abstract This chapter deals with general equilibrium theory in a risky environment, where agents interact in a financial market. The chapter starts by presenting the notion of Pareto optimality and its implications in terms of risk sharing. The concept of rational expectations equilibrium is introduced and characterized in the context of a two-period economy. Different financial market structures are considered, with a particular attention to the important case of complete markets. The last part of the chapter is devoted to the fundamental theorem of asset pricing, which relates the absence of arbitrage opportunities to the existence of a strictly positive linear pricing functional. The relation of this important result to the existence of an equilibrium of an economy and its implications for the valuation of financial assets are also discussed.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprfcp:978-1-4471-7322-9_4

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DOI: 10.1007/978-1-4471-7322-9_4

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