Index Analytics and Management

An index is a measure of something, and in the world of finance we come across many kinds - stock, bond and commodity indexes, to name a few. These offer a view into the performance of those markets by choosing a representative sample of stocks, bonds, and commodities respectively, whose performance is tracked.

A stock index would typically constitute a basket of securities, and the movement in their prices from one day to the next would be reflected in the way the index moves in that same period. Instead of monitoring a great many different securities, it would suffice to just track a single index to get an insight of how well those stocks are doing.

Indexes can be constituted to look at a particular subset of the market – an index may focus for instance, on an entire country, a certain business sector, the most liquid stocks, the largest stocks by market capitalization, etc. Some of the best known stock indexes from across the world are the Dow Jones Industrial Average (DJIA), Financial Times Stock Exchange 100 (FTSE 100), Standard and Poor’s 500 (S&P 500), Nikkei 225 (Nikkei) and the Hang Seng Index.

Features of an Index

Creating, calculating and carrying out all the functions required to maintain an index is a complex process. Some key attributes and terms associated with an index include:

  • Weighting Methodology – Indexes can be composed by weighting their constituents in different ways. Price-weighted, Market-Capitalization-weighted, and Equally-weighted are three examples.
  • Free-Float Adjusted Factor (FAF) – Not every share that has been issued in the market is freely tradable. Strategic holdings, for instance, are considered illiquid. The free-float adjusted factor is a measure of the ratio of liquid shares to the total.
  • Cap Factor – In order to not allow any one constituent of an index to have undue influence on its value, a cap factor may need to be employed to constrain its impact on the index.
Processes Associated with Maintaining an Index
  • Index Review
  • Index Rebalancing
  • Index Back-testing
  • Ad-hoc Enquiries and Factsheets
  • Industry-sector Classification
  • Calculation of the index itself, after having worked out the FAF and Cap Factor
Challenges Faced

Managing and maintaining all aspects of an index is a complex and time consuming process. Data from multiple sources need to be scanned, current processes are considerably manual, and in order to achieve a high degree of accuracy which is critical in the dissemination of an index, an inordinate amount of resources must be invested in terms of man-hours. It can take several days to complete an Index Review or Re-balancing of an index. The same is true for the Back-testing exercise. Furthermore, due to the complexity of the process, it may not be feasible to perform the back-testing operation for some scenarios.

The Fuzzy Logix Solution
  • Automates the process of calculating an index and performing all the functions associated with maintaining it
  • Saves an enormous amount of time and tedium, and eliminates inaccuracies
  • Facilitates periodic Index Rebalancing
  • The process of Index Review is greatly simplified with the provision of a library of calculations that the user can choose from, and combine in different ways, to decide which constituents pass the eligibility criteria
  • Index Back-testing rendered a quick and easy process with user-definable eligibility criteria using a library of calculations that can be combined in different ways. Time series can be generated, and multiple trials can be performed, refining the proposed index iteratively. Significantly reduces time to develop new index products by reducing time from concept to market launch.
  • Ad-hoc enquiries can be performed with ease e.g. index constituent changes, which constituent of an index has changed the most in terms of percentage points, historical time-series, etc.
  • Ability to produce factsheets with the user having the flexibility of choosing what components to display
  • Can be used to perform Industry Classification of listed companies; classification is multi-tier
Index Analytics and Management
Index Analytics and Management