2-Financial Markets Page 46 Wednesday, February 4, 2004 1:15 PM
46 The Mathematics of Financial Modeling and Investment Managementoperated electronic communications networks (ECNs) has developed
and is growing quickly.
In the United States there are two national stock exchanges: the New
York Stock Exchange (NYSE) and the American Stock Exchange (AMEX
or ASE). In addition to the national exchanges, there are regional stock
exchanges in Boston, Chicago (called the Midwest Exchange), Cincinnati,
San Francisco (called the Pacific Coast Exchange) and Philadelphia.
Regional exchanges primarily trade stocks from corporations based within
their region. The major OTC market in the United States is NASDAQ (the
National Association of Securities Dealers Automated Quotation System.
In 1998, NASDAQ and AMEX merged to form the NASDAQ-AMEX
Market Group, Inc.Stock Market Indicators
Stock market indicators have come to perform a variety of functions,
from serving as benchmarks for evaluating the performance of profes-
sional money managers to answering the question, “How did the mar-
ket do today?” Thus, stock market indicators (indexes or averages) have
become a part of everyday life. Even though many of the stock market
indicators are used interchangeably, it is important to realize that each
indicator applies to, and measures, a different facet of the stock market.
The most commonly quoted stock market indicator is the Dow
Jones Industrial Average (DJIA). Other popular stock market indicators
cited in the financial press are the Standard & Poor’s 500 Composite
(S&P 500), the New York Stock Exchange Composite Index (NYSE
Composite), the NASDAQ Composite Index, and the Value Line Com-
posite Average (VLCA). There are a myriad of other stock market indi-
cators such as the Wilshire stock indexes and the Russell stock indexes,
which are followed primarily by institutional money managers.
In general, market indexes rise and fall in fairly similar patterns.
Although the correlations among indexes are high, the indexes do not
move in exactly the same way at all times. The differences in movement
reflect the different manner in which the indexes are constructed. Three
factors enter into that construction: the universe of stocks represented by
the sample underlying the index, the relative weights assigned to the stocks
included in the index, and the method of averaging across all the stocks.
Some indexes represent only stocks listed on an exchange. Examples
are the DJIA and the NYSE Composite, which represent only stocks
listed on the NYSE or Big Board. By contrast, the NASDAQ includes
only stocks traded over the counter. A favorite of professionals is the
S&P 500 because it is a broader index containing both NYSE-listed and
OTC-traded shares. Each index relies on a sample of stocks from its