A Guide to Equity Index Construction (2nd Edition)
First published:
ISBN: 9781782724483
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Innovative indices
Innovative indices
Preface
Acknowledgements
Introduction
Which benchmark?
Modern portfolio theory and the benchmark index
Sampling and selection
Construction method
Making the index investable
Collection and processing of data
Servicing and maintenance
How to handle industries
How to handle countries and currencies
Factor indices and smart beta
Innovative indices
The commercial indices
Indexation and exchange-traded funds
Bespoke “custom-made” indices
Tying it all together
Appendix: The GICS methodology
Bibliography
Disclaimer
INTRODUCTION
“The financial industry continuously develops new ways to construct financial indices, market proxies and benchmarks.”
—Aboura and Chevallier (2017)
This chapter addresses recent innovation in indices. As previous chapters have shown, commercial index providers have undergone a transformation in their approach and usage over time. With such a proliferation of product, providers are focusing on designing new indices that cater to the specific needs, such as hedge fund or property indices. This shift marks a departure from traditional index construction methodologies. In order to understand the direction of travel, we now define innovation in the context of indices.
Definition 12.1. Innovation Innovation refers to the introduction of novel and creative approaches to design, develop and manage indices. It involves the implementation of unique methodologies, data sources and criteria to construct benchmarks that better address specific investment objectives, market conditions or investor preferences.
The most innovative indices are those that evolve through continuous consultation with their users. An exemplary illustration of this approach is seen in the practices of Morgan
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