Economic Theory

, Volume 23, Issue 3, pp 553–568 (2004) | Cite as

Arbitrage and equilibrium in strategic security markets

  • Leonidas C. Koutsougeras
  • Konstantinos G. Papadopoulos
Original Paper


In view of the fundamental price taking hypothesis, arbitrage is never compatible with equilibrium in Walrasian markets because the existence of an arbitrage opportunity in a competitive situation always leads to unbounded arbitrage activity. In strategic markets however, the mere effort of individuals to profit alters market clearing prices and thus distorts arbitrage opportunities as well. This observation suggests a different relationship between arbitrage and equilibrium, than in the competitive model. Indeed, we show that in such markets a spread between the cost of a portfolio and its returns is compatible with equilibrium. We provide an example of an equilibrium where a resourceless individual holds a portfolio with zero cost and positive return in every state. We further demonstrate via an asymptotic result, that no arbitrage is intimately related to price taking behaviour.

Keywords and Phrases:

Arbitrage Strategic security markets Market completeness. 

Copyright information

© Springer-Verlag Berlin/Heidelberg 2004

Authors and Affiliations

  • Leonidas C. Koutsougeras
    • 1
  • Konstantinos G. Papadopoulos
    • 2
  1. 1.School of Economic StudiesUniversity of ManchesterManchesterUK
  2. 2.Department of EconomicsAristotle University of ThessalonikiThessalonikiGREECE

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