Modern Portfolio Theory: Foundations, Analysis, and New Developments, + Website

Chapter 20

Stock Market Developments

Stock markets have changed more since the year 2000 than they did during the 50 years before 2000. Technological advancements have reshaped securities markets, new high-tech stock markets have been created, old stock exchanges have consolidated in new and unusual ways, the Securities and Exchange Commission (SEC) has written new laws to encourage and facilitate these changes, stock exchanges' trading orders have been implemented in new ways that increase market liquidity, and there have been other developments that may have implications for Markowitz portfolio theory. This chapter assesses the impact of these recent developments on Markowitz portfolio theory and analysis. Conclusions are reached about what stock market changes favor the use of Markowitz portfolio analysis, and what changes are not favorable.

A market is a public arena where buyers and sellers come together to trade. Traditional stock exchanges like the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE) have impressive physical locations. In recent years, electronic technology has made the existence of a physical location less important. The National Association of Securities Dealers Automated Quotations, or Nasdaq, for example, is a successful market that is not associated with any physical location.¹ And the informal interbank foreign exchange market (forex), which is the largest financial market in the world, has no central headquarters. It seems that having ...