Finally, you can predict stock indices such as the Dow Jones for instance. This increased the free float and thus also the weight of EADS in various stock indices. In addition, it may be easier for corporate entities to raise investment finance from domestic capital markets with continuing improvements in stock market indices. Palabras llave: Stock markets; stock market indices ; emerging countries; macroeconomic variables; VAR model.

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Regions may be defined geographically e. The concept may be extended well beyond an exchange. The Wilshire Index, the original total market index, includes the stocks of nearly every public company in the United States , including all U.

Other indices may track companies of a certain size, a certain type of management, or more specialized criteria such as in fundamentally based indexes. Ethical indices have a particular interest in mechanical criteria, seeking to avoid accusations of ideological bias in selection, and have pioneered techniques for inclusion and exclusion of stocks based on complex criteria.

Another means of mechanical selection is mark-to-future methods that exploit scenarios produced by multiple analysts weighted according to probability, to determine which stocks have become too risky to hold in the index of concern. Critics of such initiatives argue that many firms satisfy mechanical "ethical criteria", e. Indeed, the seeming "seal of approval" of an ethical index may put investors more at ease, enabling scams.

One response to these criticisms is that trust in the corporate management, index criteria, fund or index manager, and securities regulator, can never be replaced by mechanical means, so " market transparency " and " disclosure " are the only long-term-effective paths to fair markets.

From a financial perspective, it is not obvious whether ethical indices or ethical funds will out-perform their more conventional counterparts. Theory might suggest that returns would be lower since the investible universe is artificially reduced and with it portfolio efficiency. On the other hand, companies with good social performances might be better run, have more committed workers and customers, and be less likely to suffer reputation damage from incidents oil spillages, industrial tribunals, etc.

The difference between the full capitalization, float-adjusted, and equal weight versions is in how index components are weighted. Thus, price movement of even a single security will heavily influence the value of the index even though the dollar shift is less significant in a relatively highly valued issue, and moreover ignoring the relative size of the company as a whole.

Thus, a relatively small shift in the price of a large company will heavily influence the value of the index. Capitalization- or share-weighted indices have a full weighting, i. Many indices are based on a free float -adjusted weighting.

An equal-weighted index is one in which all components are assigned the same value. It is similar to a capitalization weighting with one main difference: the largest stocks are capped to a percent of the weight of the total stock index and the excess weight will be redistributed equally amongst the stocks under that cap.

For these two indexes, a score is calculated for every stock, be it their growth score or the value score a stock cannot be both and accordingly they are weighted for the index. This then gives the average return for all investors; if some investors do worse, other investors must do better excluding costs. This considers risk and return and does not consider weights relative to the entire market. This may result in overweighting assets such as value or small-cap stocks, if they are believed to have a better return for risk profile.

These investors believe that they can get a better result because other investors are not very good. The capital asset pricing model says that all investors are highly intelligent, and it is impossible to do better than the market portfolio, the capitalization-weighted portfolio of all assets.

However, empirical tests conclude that market indices are not efficient. The practical conclusion is that using capitalization-weighted portfolios is not necessarily the optimal method.

As a consequence, capitalization-weighting has been subject to severe criticism see e. Haugen and Baker , Amenc, Goltz, and Le Sourd , or Hsu , pointing out that the mechanics of capitalization-weighting lead to trend following strategies that provide an inefficient risk-return trade-off.

Other stock market index weighting schemes[ edit ] While capitalization-weighting is the standard in equity index construction, different weighting schemes exist. As an answer to the critiques of capitalization-weighting, equity indices with different weighting schemes have emerged, such as "wealth"-weighted Morris, , Fundamentally based indexes Robert D. Arnott , Hsu and Moore , "diversity"-weighted Fernholz, Garvy, and Hannon or equal-weighted indices.

Active annual "U. Unlike a mutual fund , which is priced daily, an exchange-traded fund is priced continuously, is optionable, and can be sold short.


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