ABSTRACT
An array of stock market indices has been developed to meet the strong demand for aggregate measures of stock market performance. These indices are designed to quantify widespread movements in stock market prices; either for the market as a whole or for major sections of the market. Market indices differ in the way they are constructed, and this has implications for the properties of the resulting index values, and the relationship between the prices of the individual shares quoted on the exchange. Understanding the behaviour of stock market indices has important implications for the market in futures contracts on stock index futures. Stock market indices can be classified using two criteria: the weighting system (market value weighted, price weighted or equally weighted) and the averaging procedure (arithmetic or geometric). This chapter considers the merits of geometric and arithmetic indices by presenting the advantages and disadvantages of a geometric index relative to an arithmetic index.
