Article published by Stefano Bosi, Patrice Fontaine and Cuong LeVan in the Mathematical Social Sciences jounral of Elsevier in May 2016.Patrice Fontaine is head of Devinci Research Center at Pôle Léonard de Vinci.
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 inter- national financial markets.
Second, we introduce the concept of common no arbitrage and we show its equivalence to the 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 define also the exchange rates between currencies of different countries.
The UIP 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.
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Full article: http://www.sciencedirect.com/science/article/pii/S016548961630018X