Systemic Risk Centre Discussion Papers DP 6
We study an economy with segmented financial markets and strategic arbitrageurs who link these markets. We show that the equilibrium of the arbitraged economy is asymptotically Walrasian in the sense that it converges to the equilibrium of an appropriately defined competitive economy with no arbitrageurs. The equilibrium of this competitive economy, called Walrasian equilibrium with restricted consumption, is related to - though not identical to - the well-known Walrasian equilibrium with restricted participation. This characterization serves to clarify the role that arbitrageurs play in integrating markets.