Martingale-Like Behavior of Prices / Christopher A. Sims.

Format:

Book

Author/Creator:

Sims, Christopher A.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0489.

NBER working paper series no. w0489

Language:

English

Subjects (All):

Interest rates--Mathematical models.

Interest rates.

Prices--Mathematical models.

Prices.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1980.

Cambridge, Massachusetts : National Bureau of Economic Research, 1980.

Summary:

Asset prices set in a competitive market need not be martingales; that is, it need not be true that the best predictor of future prices is the current price. Nonetheless, statistical tests for this property are sometimes treated as tests for the proper functioning of an asset market; asset prices often seem to have the property to a close approximation, and it is sometimes supposed that the martingale ought to be imposed on econometric models of asset markets and forecasts made from them. This paper shows that under general conditions, which allow among other things for risk aversion among market participants, competitive asset prices ought to be locally -- over small units of time -- martingale-like. This implies that tests of proper functioning of the market ought to be conducted with data at fine time intervals; results of such tests should not be used to justify imposing the martingale property on a model's long-term projections of asset prices.

Notes:

Print version record

June 1980.