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The fundamental theorem of mathematical finance states that under the assumption of no arbitrage (which is by the way an idealization and not possible in the real world), a probability measure exists under which all "relative asset prices" are martingales. What is meant by "relative asset prices" is the asset prices divided by the price of one particular ...


As in the vonjd's answer martingale property makes some sense only if considered with the risk premium and risk-free rate ("stochastic discount factor" they say). Discounted stock price process is assumed to be a martingale in many studies. The root of H02's "evil" is Fama's Efficient Market Hypothesis Survey. It is the most clear and comprehensive survey ...

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