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No unbounded arbitrage, weak no market

arbitrage and no arbitrage price system

conditions: The circular results.

Manh-Hung Nguyen

a

and Thai Ha-Huy

b

aTHEMA, Cergy-Pontoise University

E-mail: mnguyen@u-cergy.fr

bCES, Paris-1 Pantheon-Sorbonne University

E-mail: thai.ha-huy@m4x.org

March 1, 2008

Abstract

Page and Wooders (1996) prove that the no-unbounded-arbitrage (NUBA) condition introduced by Page (1987) is equivalent to the existence of a no arbitrage price (NAPS) when no agent has non-null useless vectors. Al-louch, Le Van and Page (2002) show that their generalized NAPS condition is actually equivalent to the weak-no-market-arbitrage (WNMA) condition introduced by Hart (1974). They mention that this result implies the one given by Page and Wooders (1996). In this note, we show that these results are actually circular.

Keywords: Arbitrage, Equilibrium, Recession cone. JEL Classification: C62, D50.

We would like to thank to Cuong Le Van for having suggested the result obtained in this note. Corresponding author: M.H. Nguyen.

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1

Introduction

Allouch, Le Van and Page (2002) consider the problem of competitive equilibrium in an unbounded exchange economy by exploiting the geometry of arbitrage. They generalize the definition of no-arbitrage-price-systems (NAPS) introduced by Werner (1987) to the case where some agent in the economy has only useless vectors. They show that this generalized NAPS condition is actually equivalent to the weak-no-market-arbitrage (WNMA) condition introduced by Hart (1974). They mention that this result implies the one given by Page and Wooders (1996) who prove that the no-unbounded-arbitrage (NUBA) introduced by Page (1987) is equivalent to NAPS when no agent has non-null useless vectors. The proof of the claims consist of two parts. One is very easy (NAPS implies WNMA or NAPS implies NUBA). The converse part is more difficult. The purpose of this note is to show that if the statement NUBA implies NAPS (Page and Wooders (1996)) is true then we have WNMA implies NAPS (Allouch, Le Van and Page (2002)). But it is obvious that if the second statement holds then the first one also holds. The novelty of the result of this note is that the results are self-contained. While Allouch, Le Van and Page (2002) prove WNMA implies NAPS by using a difficult Lemma in Rockafellar (1970) then deduce that NUBA implies NAPS when no agent has non-null useless vectors, we show that these results are actually circular. In some mathematical senses, these results let us to think of the circular tours of Brouwer and Kakutani fixed-point theorems. Moreover, the proofs which we provide are simple and elementary.

We consider an unbounded exchange economy E with m agents indexed by

i = 1, . . . , m. Each agent has an endowment ei ∈ Rl, a consumption set X

i

which is a closed, convex non-empty subset of Rl and a upper semi-continuous,

quasi-concave utility function ui from X i to R.

For a subset X ⊂ Rl, let denote intX the interior of X, Xo is the polar of

X where Xo = {p ∈ Rl | p.x ≤ 0, ∀ x ∈ X} and Xoo = (Xo)o. If X is closed,

convex and contains the origin then Xoo = X. Denote also X the closure of X.

For x ∈ Xi, let

b

Pi(x) = {y ∈ Xi | ui(y) ≥ ui(x)}

be the weak preferred set a x by agent i and let Ri(x) be its recession cone (see

Rockaffellar (1970) ). It is called the set of useful vectors for ui and is defined as

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The lineality space of i is defined by

Li(x) = {w ∈ Rl | ui(x + λw) ≥ ui(x), for all λ ∈ R} = Ri(x) ∩ −Ri(x)

Elements in Li will be called useless vectors . Let denote Ri = Ri(ei), Li = Li(ei)

and L⊥

i is the orthogonal space of Li. It is easy to check that Ri(x) is a closed

convex cone.

Let us first recall the no-unbounded-arbitrage condition denoted now on by NUBA introduced by Page (1987) which requires non-existence of an unbounded set of mutually compatible net trades which are utility non decreasing.

Definition 1 The economy satisfies the NUBA condition if Pmi=1wi = 0 and

wi ∈ R

i for all i implies wi = 0 for all i.

There exists a weaker condition, called the weak-no-market-arbitrage condi-tion (WNMA), introduced by Hart[1974] which requires that all mutually com-patible net trades which are utility non-decreasing be useless.

Definition 2 The economy satisfies the WNMA condition if Pmi=1wi = 0 and

wi ∈ R

i for all i implies wi ∈ Li for all i.

If Li = {0}, ∀ i, then WNMA is NUBA.

We shall use the concepts of no-arbitrage-price system condition (NAPS) as in Allouch, Le Van, Page (2002). Define the notion of no-arbitrage price:

Definition 3 Si = ( {p ∈ L⊥ i | p.w > 0, ∀ w ∈ (Ri∩ L⊥i )\{0} if Ri\Li 6= ∅} L⊥ i if Ri = Li )

Observe that, when Li = {0}, then we can write

Si = {p ∈ Rl| p.w > 0, ∀ w ∈ Ri\{0}}.

Definition 4 The economy E satisfies the NAPS condition if ∩iSi 6= ∅.

2

The circular results

As we mentioned above, the proofs of the implications NAPS=⇒NUBA and NAPS =⇒WNMA are easy. We now give elementary proofs for NUBA=⇒NAPS and WNMA=⇒NAPS.

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Lemma 1 WNMA=⇒ Pi(Ri∩ L⊥i ) is closed.

In particular, if Li = {0} for all i, then NUBA =⇒

P

iRi is closed.

Proof: Assume that there exists a sequence Piwi

n −→ w, with wni ∈ Ri∩ L⊥i

for all i and n. We shall prove that the sumPi || wi

n|| is bounded, and then the

vector w is inPi(Ri∩ L⊥i ). Suppose that

lim n→∞ X i || wi n||= +∞ Then we have lim n→+∞ m X i=1 wi n P i || wni || = 0, lim n→+∞ m X i=1 || wi n|| P i || wni || = 1. Therefore we can suppose that Pwin

i||win|| → w

i when n → +∞. Note that R i is a

closed convex cone, we have wi ∈ R i and

P

iwi = 0,

P

i || wi ||= 1. But WNMA

condition implies that wi ∈ L

i, we also have wi ∈ L⊥i . Hence, for all i, wi = 0

that leads to a contradiction.

The following result has been proven by Page and Wooders (1996) where they used Dubovitskii-Milyutin (1965) theorem. We give here an elementary proof to make the note self-contained.

Proposition 1 Assume Li = {0}, ∀ i, then NUBA =⇒ NAPS.

Proof: Since Li = {0}, then Si 6= ∅ ∀ i. Assume now that ∩iSi = ∅. Then ∩iS i

is contained in a linear subspace H ⊂ Rl since int∩

iSi =int∩iS i

= ∅. It follows from Si = −(Ri)o that ∩iSi = −(

P iRi)o ⊂ H. This implies H⊥⊂ (X i Ri)oo.

The sum PiRi is closed by lemma 1, then

P

iRi = (

P

iRi)oo since it is closed

convex set and contains the origin. Hence, H⊥ P

iRi and

P

iRi contains a

line.

Thus there exist r ∈ H⊥, r 6= 0, −r ∈ H and (r1, . . . , rm) 6= 0, ri ∈ R i such that r = m X i=1 ri

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Since −r ∈PiRi, there exit (r01, . . . , r0m) 6= 0, r0i∈ Ri such that

X

i

r0i = −r.

ThereforePi(ri + r0i) = 0 and ri+ r0i∈ R

i since Ri is the convex cone. By the

NUBA condition, we have ri = −r0i. This means that, for some i, R

i contains a

line and Si = ∅: a contradiction.

Allouch, Le Van and Page (2002) prove the equivalence of NAPS and WNMA by using a lemma which is based on the support function (Corollary 16.2.2 in Rockafellar (1970)). Actually, from Proposition 1, we get the following proposi-tion, the proof of which is elementary.

Proposition 2 WNMA =⇒ ∩iSi 6= ∅

Proof: Consider a new economy eE = ( eXi, eui, eei) defined as

e

Xi = Xi∩ L⊥i , eui = ui |Xei, eei = (ei) e

Ri = Ri∩ L⊥i

We have eLi = (Ri∩ L⊥i ) ∩ −(Ri∩ L⊥i ) = {0}. Hence, in the economy eE, WNMA

is NUBA. Proposition 1 implies that ∩iSei 6= ∅ where

e

Si = {p ∈ Rl | p.w > 0, ∀ w ∈ (Ri∩ L⊥i )\{0}}.

It is easy to see that eSi = Si+ Li. Thus, if (∩iSei) ∩ (∩iL⊥i ) 6= ∅, then ∩iSi 6= ∅.

We will show that (∩iSei) ∩ (∩iL⊥i ) 6= ∅.

On the contrary, assume that (∩iSei) ∩ (∩iL⊥i ) = ∅. By using a separation

theorem, note that ∩iSei is open and ∩iL⊥i is a subspace, there exists a vector

w 6= 0 such that: w.p > 0 = w.l, ∀ p ∈ ∩iSei, ∀ l ∈ ∩iL⊥i . Therefore, we get w ∈ m X i=1 Li. Moreover, we have w.p ≥ 0 ∀p ∈ ∩iSei.

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Since for every i, eSi is open, and ∩iSei 6= ∅ we have ∩iSei = ∩iSei. From the lemma

1,PiRei is closed. We then have:

w ∈ −(∩iSei)o = ( X i e Ri)oo = X i e Ri

Therefore, there exist,∀i, li ∈ Li, ewi ∈ eRi such that w =

P

ili =

P

iwei or

P

i(li− ewi) = 0. The WNMA implies that li− ewi ∈ Li. Since eRi = Ri ∩ L⊥i , it

implies that ewi ∈ L

i and ewi ∈ L⊥i . Thus ewi = 0 for all i and w = 0: we obtain a

contradiction. The proof is complete. The following result is trivial:

Proposition 3 If Proposition 2 holds then Proposition 1 holds.

References

[1] Allouch, N., C.Le Van and F.H.Page:. The geometry of arbitrage and the existence of competitive equilibrium. Journal of Mathematical Economics 38, 373-391.

[2] Dana, R.A, C.Le Van and F.Magnien (1999): On the different notions of arbitrage and existence of equilibrium. Journal of Economic Theory 86, 169-193.

[3] Hart, O. (1974): On the Existence of an Equilibrium in a Securities Model.

Journal of Economic Theory 9, 293-311.

[4] Page, F.H. Jr, Wooders M.H, (1996): A necessary and sufficient condition for compactness of individually rational and feasible outcomes and existence of an equilibrium. Economics Letters 52, 153-162.

[5] Page, F.H (1987): On equilibrium in Hart’s securities exchange model.

Jour-nal of Economic Theory 41, 392-404.

[6] Rockafellar, R.T (1970): Convex Analysis, Princeton University Press,

Princetion, New-Jersey.

[7] Werner, J.(1987): Arbitrage and the Existence of Competitive Equilibrium.

References

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