Financial Terms Market model

# Definition of Market model

## Market model

This relationship is sometimes called the single-index model. The market model says that the
return on a security depends on the return on the market portfolio and the extent of the security's
responsiveness as measured, by beta. In addition, the return will also depend on conditions that are unique to
the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against
returns on the market portfolio.

# Related Terms:

## QMDM (quantitative marketability discount model)

model for calculating DLOM for minority interests r the discount rate

## Characteristic line

The market model applied to a single security. The slope of the line is a security's beta.

## Single-index model

Related: market model

## Arbitrage-free option-pricing models

Yield curve option-pricing models.

## Asset pricing model

A model for determining the required rate of return on an asset.

## Asset pricing model

A model, such as the Capital Asset Pricing model (CAPM), that determines the required
rate of return on a particular asset.

## Auction markets

markets in which the prevailing price is determined through the free interaction of
prospective buyers and sellers, as on the floor of the stock exchange.

## Bear market

Any market in which prices are in a declining trend.

## bear market

A market in which stock or bond prices are generally
falling.

## Bear Market

A prolonged period of falling stock market prices.

## Binomial model

A method of pricing options or other equity derivatives in
which the probability over time of each possible price follows a binomial
distribution. The basic assumption is that prices can move to only two values
(one higher and one lower) over any short time period.

## Binomial option pricing model

An option pricing model in which the underlying asset can take on only two
possible, discrete values in the next time period for each value that it can take on in the preceding time period.

## Black market

An illegal market.

## Black-Scholes model

The first complete mathematical model for pricing
options, developed by Fischer Black and Myron Scholes. It examines market
price, strike price, volatility, time to expiration, and interest rates. It is limited
to only certain kinds of options.

## Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.

## Brokered market

A market where an intermediary offers search services to buyers and sellers.

## Bull market

Any market in which prices are in an upward trend.

## bull market

A market in which stock or bond prices are generally rising.

## Bull Market

A prolonged period of rising stock market prices.

## Bulldog market

The foreign market in the United Kingdom.

## Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security

## Capital Asset Pricing Model (CAPM)

A model for estimating equilibrium rates of return and values of
assets in financial markets; uses beta as a measure of asset risk
relative to market risk

## capital asset pricing model (CAPM)

Theory of the relationship between risk and return which states that the expected risk
premium on any security equals its beta times the market risk premium.

## Capital market

The market for trading long-term debt instruments (those that mature in more than one year).

## Capital market

The market in which investors buy and sell shares of companies, normally associated with a Stock Exchange.

## Capital Market

A market that specializes in trading long-term, relatively high risk
securities

## Capital Market

The market in which savings are made available to those needing funds to undertake investment projects. A financial market in which longer-term (maturity greater than one year) bonds and stocks are traded.

## Capital market efficiency

Reflects the relative amount of wealth wasted in making transactions. An efficient
capital market allows the transfer of assets with little wealth loss. See: efficient market hypothesis.

## Capital market imperfections view

The view that issuing debt is generally valuable but that the firm's
optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net
corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of
asymmetric information, asymmetric taxes, and transaction costs.

## Capital market line (CML)

The line defined by every combination of the risk-free asset and the market portfolio.

## capital markets

markets for long-term financing.

## Cash markets

Also called spot markets, these are markets that involve the immediate delivery of a security
or instrument.
Related: derivative markets.

## Common market

An agreement between two or more countries that permits the free movement of capital
and labor as well as goods and services.

## Common stock market

The market for trading equities, not including preferred stock.

## Complete capital market

A market in which there is a distinct marketable security for each and every
possible outcome.

## constant-growth dividend discount model

Version of the dividend discount model in which dividends grow at a constant rate.

## Constant-growth model

Also called the Gordon-Shapiro model, an application of the dividend discount
model which assumes (1) a fixed growth rate for future dividends and (2) a single discount rate.

## Corner A Market

To purchase enough of the available supply of a commodity or stock in order to
manipulate its price.

## Dealer market

A market where traders specializing in particular commodities buy and sell assets for their
own accounts.

## Debt market

The market for trading debt instruments.

## Derivative markets

markets for derivative instruments.

## Deterministic models

Liability-matching models that assume that the liability payments and the asset cash
flows are known with certainty. Related: Compare stochastic models

## Direct search market

Buyers and sellers seek each other directly and transact directly.

## Discounted dividend model (DDM)

A formula to estimate the intrinsic value of a firm by figuring the
present value of all expected future dividends.

## dividend discount model

Computation of today’s stock price which states that share value equals the present value of all expected future dividends.

## Dividend discount model (DDM)

A model for valuing the common stock of a company, based on the
present value of the expected cash flows.

## Dividend growth model

A model wherein dividends are assumed to be at a constant rate in perpetuity.

## DLOM (discount for lack of marketability)

an amount or percentage deducted from an equity interest to reflect lack of marketability.

## Domestic market

Part of a nation's internal market representing the mechanisms for issuing and trading
securities of entities domiciled within that nation. Compare external market and foreign market.

## economic components model

Abrams’ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.

## Efficient capital market

A market in which new information is very quickly reflected accurately in share
prices.

## efficient capital markets

Financial markets in which security prices rapidly reflect all relevant information about asset values.

## Efficient Market Hypothesis

In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the market
return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider
information).

## Efficient Markets Hypothesis

The hypothesis that securities are typically in equilibrium--that they are fairly priced in the sense that the price reflects all publicly available information on the security.

## Either-way market

In the interbank Eurodollar deposit market, an either-way market is one in which the bid
and offered rates are identical.

## Emerging markets

The financial markets of developing economies.

## Equilibrium market price of risk

The slope of the capital market line (CML). Since the CML represents the
return offered to compensate for a perceived level of risk, each point on the line is a balanced market
condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a
unit change in risk.

## Equity market

Related:Stock market

## Eurocurrency market

The money market for borrowing and lending currencies that are held in the form of
deposits in banks located outside the countries of the currencies issued as legal tender.

## Excess return on the market portfolio

The difference between the return on the market portfolio and the
riskless rate.

## External market

Also referred to as the international market, the offshore market, or, more popularly, the
Euromarket, the mechanism for trading securities that (1) at issuance are offered simultaneously to investors
in a number of countries and (2) are issued outside the jurisdiction of any single country. Related: internal
market

## Extrapolative statistical models

models that apply a formula to historical data and project results for a
future period. Such models include the simple linear trend model, the simple exponential model, and the
simple autoregressive model.

## Factor model

A way of decomposing the factors that influence a security's rate of return into common and
firm-specific influences.

## Fair market price

Amount at which an asset would change hands between two parties, both having
knowledge of the relevant facts. Also referred to as market price.

## Fair market value

The price that an asset or service will fetch on the open market.

## Fair Market Value

The highest price available, expressed in terms of cash, in an open and unrestricted market between informed, prudent parties acting at arm's length and under no compulsion to transact.

See here

## Federal funds market

The market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess reserves.

## Federal Open Market Committee (FOMC)

Fed committee that makes decisions about open-market operations.

## Financial market

An organized institutional structure or mechanism for creating and exchanging financial assets.

## financial markets

markets in which financial assets are traded.

## Fixed-income market

The market for trading bonds and preferred stock.

## Foreign banking market

That portion of domestic bank loans supplied to foreigners for use abroad.

## Foreign bond market

That portion of the domestic bond market that represents issues floated by foreign
companies to governments.

## Foreign equity market

That portion of the domestic equity market that represents issues floated by foreign companies.

## Foreign Exchange Market

A worldwide market in which one country's currency is bought or sold in exchange for another country's currency.

## Foreign market

Part of a nation's internal market, representing the mechanisms for issuing and trading
securities of entities domiciled outside that nation. Compare external market and domestic market.

## Foreign market beta

A measure of foreign market risk that is derived from the capital asset pricing model.

## Forward Exchange Market

A market in which foreign exchange can be bought or sold for delivery (and payment) at some specified future date but at a price agreed upon now.

## Forward market

A market in which participants agree to trade some commodity, security, or foreign
exchange at a fixed price for future delivery.

## Fourth market

Direct trading in exchange-listed securities between investors without the use of a broker.

## Futures market

A market in which contracts for future delivery of a commodity or a security are bought or sold.

## Garmen-Kohlhagen option pricing model

A widely used model for pricing foreign currency options.

## Gordon model

present value of a perpetuity with growth.
The end-ofyear Gordon model formula is: 1/(r - g)
and the midyear formula is: SQRT(1 + r)/(r - g).

## Gray market

Purchases and sales of eurobonds that occur before the issue price is finally set.

## Index and Option Market (IOM)

A division of the CME established in 1982 for trading stock index
products and options. Related: Chicago Mercantile Exchange (CME).

## Index model

A model of stock returns using a market index such as the S&P 500 to represent common or
systematic risk factors.

## Intermarket sector

spread The spread between the interest rate offered in two sectors of the bond market for
issues of the same maturity.

An exchange of one bond for another based on the manager's projection of a
realignment of spreads between sectors of the bond market.

## Internal market

The mechanisms for issuing and trading securities within a nation, including its domestic
market and foreign market.
Compare: external market.

## Internally efficient market

Operationally efficient market.

## International market

Related: See external market.

## International Monetary Market (IMM)

A division of the CME established in 1972 for trading financial
futures. Related: Chicago Mercantile Exchange (CME).

a model that involves
(1) few physical assets,
(2) little management hierarchy, and
(3) a direct pipeline to customers

The spread between two issues of the same maturity within a market sector. For
instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility
corporate bonds.

## Inverted market

A futures market in which the nearer months are selling at price premiums to the more

## Locked market

A market is locked if the bid = ask price. This can occur, for example, if the market is
brokered and brokerage is paid by one side only, the initiator of the transaction.

## log size model

Abrams’ model to calculate discount rates as a function of the logarithm of the value of the firm.

## Lower of cost or market

An accounting valuation rule that is used to reduce the
reported cost of inventory to its current resale value, if that cost is lower than its
original cost of acquisition or manufacture.