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16

Samuelson suggested in 1965 that the stock prices follow a martingale (see P. Samuelson “Proof That Properly Anticipated Prices Fluctuate Randomly”). Assume there is a security with a random payoff $X_T$ at date $T$. Let $..., P_{t–1}, P_t, P_{t+1},...$ be the time series of prices of a security with this payoff. Finally, define the price change $\Delta ...


14

A martingale is a random process $X(t)$ which has the following properties: $ E[X(T)|\mathcal{F}_t] = X(t) $ for $T > t$ and $ E[|X(T)|] < \infty $ where $\mathcal{F}_t$ is the filtration at time $t$. A martingale is a random walk, but not every random walk is a martingale. A Brownian random walk is a martingale if it does not have drift. Also, a ...


6

Often one will find the argument that a random walk of price changes would be a proof of the efficient market hypothesis, but this is (IMO) a logical fallacy: Only because the EMH does imply random walks in the price changes, the finding of random walks does not imply automagically that the EMH is true.


5

A martingale can be viewed as a fair game (a game in which there is no arbitrage strategy) A (centered) random walk is a martingale (think of it as the total Gain of the fair game) If EFH is in order, then you can think that all information is in the current price, I think this more comparable to Markov Property than to Martingale property. Hope that ...


1

In the equilibrium models you can assume that there exists so called Alpha, i.e. an opportunity that can be exploited. Most of the buy side models (i.e. asset allocation, portfolio construction) are based on this idea. As a theoretical model, you can consider CAPM with heterogeneous beliefs: Hedge funds claim to generate the “Alpha”, i.e., excess ...



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