Informational Efficiency with Trading Constraints: A Characterization

17 Pages Posted: 30 Aug 2019

See all articles by Robert Jarrow

Robert Jarrow

Cornell SC Johnson College of Business

Martin Larsson

ETH Zürich - Department of Mathematics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2019

Abstract

Given a market with a price process S populated by heterogeneous traders with differential information, beliefs, and trading constraints, let the smallest information set containing all of the traders’ information be denoted F. This market is defined to be informationally efficient (Fama [2]) with respect to an information set G ⊆ F if the price process S arises as an outcome of a competitive market equilibrium. We provide a characterization of such an informationally efficient market. Roughly stated, a market is informationally efficient with respect to G if and only if there exists an equivalent probability measure that makes the price process normalized by the value of a money market account a martingale with respect to G if and only if the market satisfies no free lunch with vanishing risk (NFLVR) and no dominance (ND) with respect G. This characterization subsumes the economies and characterizations contained in the more restrictive market settings of Jarrow and Larsson [7, 8].

Keywords: informational efficiency, trading constraints, no arbitrage, no dominance, equilibrium, representative agents, martingales measures, local martingales.

JEL Classification: G11, G12, G14, D52, D53

Suggested Citation

Jarrow, Robert and Larsson, Martin, Informational Efficiency with Trading Constraints: A Characterization (July 2019). Available at SSRN: https://ssrn.com/abstract=3443134 or http://dx.doi.org/10.2139/ssrn.3443134

Robert Jarrow (Contact Author)

Cornell SC Johnson College of Business

Ithaca, NY 14850
United States

Martin Larsson

ETH Zürich - Department of Mathematics ( email )

Ramistrasse 101
Zurich, 8092
Switzerland

HOME PAGE: http://math.ethz.ch/~larssonm

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