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A preliminary examination of the no arbitrage property in the Canadian security market

University of British Columbia

This paper examines the empirical implications of the no arbitrage property using the Canadian common stock security market. In addition, an alternative security risk measure to the market "beta" is introduced and tested. The model for testing is derived from the state preference model which states that there exists a set of positive primitive security prices which is consistent with the observed set of complex security prices. A set of market kernels is estimated from the Canadian common stock data on which the testing of the no arbitrage property is based. The empirical evidence strongly suggests that there is a difference in market condition between the U.S. and Canada, and the no arbitrage property should not be rejected in Canada. Furthermore, the usefulness of the alternative security risk measure cannot be established based on the results of this paper.

Text

2010-05-08

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http://hdl.handle.net/2429/24500

Business Administration

University of British Columbia

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