Projects per year
Abstract
This note studies the behavior of an index I_t which is assumed to be a
tradable security, to satisfy the BSM model dI_t/I_t = \mu dt + \sigma dW_t,
and to be efficient in the following sense: we do not expect a prespecified
trading strategy whose value is almost surely always nonnegative to outperform
the index greatly. The efficiency of the index imposes severe restrictions on
its growth rate; in particular, for a long investment horizon we should have
\mu\approx r+\sigma^2, where r is the interest rate. This provides another
partial solution to the equity premium puzzle. All our mathematical results are
extremely simple.
Original language  English 

Number of pages  8 
Publication status  Published  11 Sept 2011 
Keywords
 efficient index
 efficient market hypothesis
 equity premium
Projects
 1 Finished

The Decision Theory of Hiring and Firing Advisors
Netherlands Organisation for Scientific Research
1/02/11 → 31/01/13
Project: Research