Arrow Debreu Prices
(2010)
Arrow Debreu prices are the prices of ‘atomic’ time and state contingent
claims which deliver one unit of a specific consumption good if a specific uncertain
state realizes at a specific future date. For instance, claims on the good
‘ice cream tomorrow’ are split into different commodities depending whether the
weather will be good or bad, so that good-weather and bad-weather ice cream
tomorrow can be traded separately. Such claims were introduced by K.J. Arrow
and G. Debreu in their work on general equilibrium theory under uncertainty,
to allow agents to exchange state and time contingent claims on goods. Thereby
the general equilibrium problem with uncertainly can be reduced to a conventional
one without uncertainty. In finite state financial models, Arrow-Debreu
securities delivering one unit of the numeraire good can be viewed as natural
atomic building blocks for all other state-time contingent financial claims; their
prices determine a unique arbitrage-free price system.