Stock market is a set of financial institutions, the leading securities trading. It consists of stock exchanges, as well as a vast array of other institutions that form the OTC market. The increase of the value of stock markets in both the national and global economy, happened due to important functional role of these markets. According to the stock market there is a transformation of accumulated savings into real investments, carried out capital mobility between sectors and countries, and securities courses provide investors with the necessary information about the direction of efficient investment.
World stock market is divided into world markets of specific securities (shares, debt instruments, derivatives). However, this classification is rather conditional, since some types of securities represented in the stock market (Jorion, 2003). Depending on the issuer can be divided into the stock market to the markets of government and corporate (non-government) securities.
It is possible to distinguish three main functions of the stock market:
mobilization, which is to mobilize idle funds investors for the purpose of organizing and scaling up businesses. Issue of securities is an important feature of the process of raising capital;
distribution (redistributive), which is the movement of available funds. Thus the flow of capital is carried out from one corporation to another, between industries, between countries in search of better investment;
information which informs investors about the situation in the stock market and gives them guidance for the placement of its capital (Jorion, 2003).
Activation of the global stock market began with the growth of foreign trade and the liberalization of foreign exchange transactions in the United States. In 1967 the United States experienced the first post-war period in the stock market crisis. It was called "paper" because the backward technology of information processing, carried out on paper, could no longer cope with the growing volume of transactions (Jorion, 2003). The crisis marked the beginning of major changes in the US stock market, including technological revolution in the exchange business, but did not affect the United States related to the stock exchanges in Europe.
The high volatility of the stock market and largely chaotic nature of the processes of formation of market prices makes it difficult to determine the yield that the investor will get. Indeed, it possible to calculate the expected return. However, according to research conducted in this area, where the expected return on financial assets is determined based on utility theory, it is associated with certain difficulties. In fact, the expected return cannot be directly measured.
There is an indicator for asset valuation risk. This is the coefficient of variation (Var), which is determined by the ratio of the standard deviation and the average asset value of the expected yield (Jorion, 2003). It is measured in percentage and describes what percentage of the risk of falls by one percent yield, you can compare the riskiness of assets with different expected returns. Since the calculation of this index is based on the use of standard deviation and expected return, then we go back to the previously mentioned problems.
Defining the long-term risks in the global market, the following issues have to be addressed. Firstly, based on the time series of actual returns, by calculating the mathematical expectation, it is possible to determine the range in which the yield will be. Secondly, the existing capital asset pricing model is poorly applied to forecast the future profitability. Yet, this model contains the assumptions that are far from the realities of trade in the financial market, such as the assumption of homogeneity of the expectations of all investors.
Reference
Jorion, P. (2003). The Long-Term risks of global stock markets. Financial Management. 32 (4), 5-26.
