COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 860

"Nonnegative Wealth, Absence of Arbitrage, and Feasible Consumption Plans"

Philip H. Dybvig and Chi-fu Huang

February 1988

A restriction to nonnegative wealth is sufficient to preclude all arbitrage opportunities in financial models that have risk neutral probabilities that are valid for all simple strategies. Imposing nonnegative wealth does not constrain agents from making the choice they would make under the standard integrability condition. This conclusion does not depend on whether the markets are complete.

JEL Classification: 313, 311

Keywords: Investments, free lunch, arbitrage, option pricing, continuous time