A Modern Approach to the Efficient-Market Hypothesis
AbstractThe Third Fundamental Theorem of Asset Pricing allows to apply the Second Fundamental Theorem under very mild regularity conditions regarding the process of asset prices. It has been shown that an economic equilibrium exists if and only if the price process is a martingale. Hence, market efficiency at least requires the absence of weak arbitrage, but this is not sufficient to establish a situation where asset prices always "fully reflect" some information beyond the price history. By contrast, completeness is a sufficient and necessary condition for a market to be informationally efficient, i.e., only in that case past and future events turn out to be independent conditional on the price history with respect to the physical measure. At the end of the paper I give different characterizations of market efficiency.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1302.3001.
Date of creation: Feb 2013
Date of revision: Jul 2013
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-02 (All new papers)
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