Market Informational Efficiency

Robert Jarrow ()

Chapter Chapter 16 in Continuous-Time Asset Pricing Theory, 2021, pp 329-343 from Springer

Abstract: Abstract Market informational efficiency is a key concept used in financial economics, introduced by Fama in the early 1970s. To formalize this concept, we need the solution to a trader’s portfolio optimization problem (as in Part II) and the meaning of an economic equilibrium (as in Chaps. 13 and 14 ). Given these insights, a rigorous definition of an efficient market can be formulated. This rigorous definition is contrasted with the intuitive definition originally provided in Fama. It will be shown that this rigorous definition of an efficient market requires only the existence, and not the characterization of an economic equilibrium. Such a rigorous definition allows new insights into the testing of an informationally efficient market, which will be discussed below. This chapter is based on Jarrow and Larsson.

Date: 2021
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DOI: 10.1007/978-3-030-74410-6_16

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