"HOW IS THE STOCK MARKET DOING?" USING ABSENCE OF ARBITRAGE TO MEASURE STOCK MARKET PERFORMANCE

Geoffrey Poitras and John Heaney
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John Heaney: Faculty of Business Administration, Simon Fraser University, Burnaby, Canada

Annals of Financial Economics (AFE), 2008, vol. 04, issue 01, 1-27

Abstract: This paper provides a methodology for measuring stock market performance based on the restrictions provided by absence of arbitrage in security prices. Under the null hypothesis that the aggregate cumulative dividend-price process follows a geometric Brownian motion, a closed form related to the inter-temporal marginal rate of substitution is derived and empirically evaluated. The stock market performance measure is based on the level of risk adjustment required to compare the value of the stock index at the starting point with the cumulative interest rate deflated value at any given point in the time series. The paper concludes with empirical tests for the martingale property of the performance measure.

Keywords: Absence of arbitrage; rational security price; S&P 500; detrending; C10; C20; G10; G17 (search for similar items in EconPapers)
Date: 2008
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Working Paper: ‘How is the Stock Market Doing?’ Using Absence of Arbitrage to Measure Stock Market Performance (2008)
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DOI: 10.1142/S2010495208500012

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