Market Equilibrium and Value Investing Flashcards
(10 cards)
Market Clearing Condition
Total demand equals total initial endowments: Σ x^a = Σ e^a.
Complete Market
Every payoff can be replicated with traded assets; unique arbitrage-free price.
Arrow Security
Pays $1 in a particular state ω and $0 otherwise.
Strong-form in Efficient Market Hypotheses
Prices reflect all public and private information.
Semi-strong EMH
Prices reflect all publicly available information.
Weak-form EMH
Prices reflect all information contained in past prices.
APT Expected Return Formula
E[r_i] = r_f + Σ_j β_{ij}·π_j (π_j = factor risk premium).
Value Investing Rule
Buy if E[r] > r_f + Σ β·π (undervalued), sell if less (overvalued).
Excess Demand Function
D(p) = Σ x^a(p) - Σ e^a; equilibrium when D(p) = 0.
State-price Measure
q_n = price of Arrow security for state ω_n; Σ q_n = 1.
