Fama: Efficient Capital Markets: A Review of Theory and Empirical Work - are martingales incorrect?

Question

In his paper, Eugene Fama gives the definition of a "fair game" as given below. I disagree. AFAIK, a martingale has the following property: $E[X_{t+tau} | X_t] = X_t$. What am I missing?

Footnote 9 says:

And again, in a previous statement:

Bob Jansen · Answer

The way I understand it is:
In equation 2 $x_{j, t + 1}$ is defined as the change in of $p_j$ over the period $t$ to $t + 1$. The formula says that the expectation of the change is zero which is the same as saying that the expectation of the original variable at $t+1$ is equal to its current value.

Fama: Efficient Capital Markets: A Review of Theory and Empirical Work - are martingales incorrect?

One Answer

Add your own answers!

Ask a Question