Vovk, Vladimir (2011) The efficient index hypothesis and its implications in the BSM model.
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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.
This is a Submitted version This version's date is: 11/9/2011 This item is not peer reviewed
https://repository.royalholloway.ac.uk/items/212c33ac-e37e-0123-9642-1a1786d3f64a/5/
Deposited by Research Information System (atira) on 03-Jul-2014 in Royal Holloway Research Online.Last modified on 03-Jul-2014
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