The Efficient Market Hypothesis as a Martingale

H Abraham

Studies in Economics and Econometrics, 2003, vol. 27, issue 2, 85-92

Abstract: It is well known that the efficient market hypothesis and a martingale are closely related. This paper studies the use of a martingale as a substitute for the efficient market hypothesis in a monetary overlapping generations economy where individuals maintain the von Neumann-Morgenstern expected utility proposition. Within this economic framework two results are derived. (1) A martingale is a direct consequence of equilibrium conditions in the optimisation of individuals’ expected utilities. (2) Learning is precluded in a successive transition from one state of equilibrium to the next. These two results accord fully with the definition of a martingale.

Date: 2003
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DOI: 10.1080/10800379.2003.12106349

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