Abstract

http://ssrn.com/abstract=1781091
 
 

References (115)



 


 



The Meaning of Market Efficiency


Robert A. Jarrow


Cornell University - Samuel Curtis Johnson Graduate School of Management

Martin Larsson


Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute

August 31, 2011

Johnson School Research Paper Series No. 07-2011

Abstract:     
Fama (1970) defined an efficient market as one in which prices always “fully reflect” available information. This paper formalizes this definition and provides various characterizations relating to equilibrium models, profitable trading strategies, and equivalent martingale measures. These various characterizations facilitate new insights and theorems relating to efficient markets. In particular, we overcome a well known limitation in tests for market efficiency, i.e., the need to assume a particular equilibrium asset pricing model, called the joint-hypothesis or bad-model problem. Indeed, we show that an efficient market is completely characterized by the absence of both arbitrage opportunities and dominated securities, an insight that provides tests for efficiency that are devoid of the bad-model problem. Other theorems useful for both the testing of market efficiency and the pricing of derivatives are also provided.

Number of Pages in PDF File: 35

Keywords: efficient markets, information sets, strong-form efficiency, semi-strong form efficiency, weak-form efficiency, martingale measures, local martingale measures, no arbitrage, no dominance, economic equilibrium

working papers series





Download This Paper

Date posted: March 10, 2011 ; Last revised: September 1, 2011

Suggested Citation

Jarrow, Robert A. and Larsson, Martin, The Meaning of Market Efficiency (August 31, 2011). Johnson School Research Paper Series No. 07-2011. Available at SSRN: http://ssrn.com/abstract=1781091 or http://dx.doi.org/10.2139/ssrn.1781091

Contact Information

Robert A. Jarrow (Contact Author)
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)
Martin Larsson
Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute ( email )
Quartier UNIL-Dorigny, Bâtiment Extranef, # 246
CH-1015 Lausanne
Switzerland
HOME PAGE: http://sfi.epfl.ch/larsson
Feedback to SSRN


Paper statistics
Abstract Views: 3,129
Downloads: 802
Download Rank: 16,217
References:  115
People who downloaded this paper also downloaded:
1. Market Efficiency, Long-Term Returns, and Behavioral Finance
By Eugene Fama

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.328 seconds