Price Dependencies and Investors’ Choice

Abstract

Under the efficient market hypothesis, where many investors resort to “buy and hold” strategies with maximum diversifications, “capitalization-weighted indexation” may offer investors the best risk-return combination. But the existence of non-linear dependences shows that prices of securities may be subject to temporary shocks that obscure their true value. In this case, “fundamental indexation” may achieve returns superior to the capitalization-weighted indexation.