Non-arbitrage and Recursive Competitive Equilibrium Pricing

Kreps (1981) shows that, in a Radner-type economy, any asset prices obeying non-arbitrage restrictions are also competitive equilibrium prices for some chosen configuration of investor preferences and endowments. Therefore, in the absence of preference and endowment restrictions, non-arbitrage and competitive equilibrium analysis are equivalent. this paper demonstrates that Kreps' equivalence theorem does not extend to a Lucas-type recursive economy. Competitive equilibrium in a recursive economy imposes a price restriction which is not imposed by non-arbitrage. We apply our result to the Cox-Ross-Rubinstein options pricing model

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