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Information and Volatility: The No-Arbitrage Martingale Approach to Timing and Resolution Irrelevancy

Authors

  • STEPHEN A. ROSS

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    • Yale School of Organization and Management. The author is grateful to Philip Dybvig, Jon Ingersoll, and Richard Roll, and the participants at the annual TIMS-ORSA meetings and the Finance Workshop at Yale for helpful comments. Any errors remain the responsibility of the author.


ABSTRACT

The no-arbitrage martingale analysis is used to study the effect on asset prices of changes in the rate of information flow. The analysis is first used to develop some simple tools for asset pricing in a continuous-time setting. These tools are then applied to determine the effect of information on prices and price volatility, to extend Samuelson's theorem on prices fluctuating randomly, and to study the impact on prices of the resolution of uncertainty. The conditions under which uncertainty resolution is irrelevant for asset pricing are shown to be similar to those which support the MM irrelevance theorems.

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