ABSTRACT
The random variables X i (t) are statevariablesthat describe the economy at any given time. We do not assume necessarily that these variables represent security prices: for instance Xl (t) could represent the value of a consumer price index, the number of laptop computers sold by IBM in 1995, or the inches of rainfall in Iowa in 1994. State variables can represent, more abstractly, investors' beliefs about future states of the market. Some state variables X i (.) may not be tradeable or even observable.
