This paper analyses a set of equity indices whose aim is to improve on capitalisation weighting and thus to provide “improved beta”.
Professor of finance and director of EDHEC-Risk Institute.
Professor of finance at EDHEC Business School and scientific director of EDHEC-Risk Institute.
Head of Applied Research at EDHEC-Risk Institute.
Research Analyst at EDHEC-Risk Institute.
Four main weighting schemes are analysed: efficient indices, fundamental indices, minimum-volatility indices, and equal-weighted indices. Empirical results for US data on these indices show that the average returns of all four alternative index construction methods are superior to those of cap-weighted equity indices and that, by several measures of risk-adjusted performance, they are likewise superior. With the notable exception of fundamental indices, which have substantial exposure to the value factor, none of the aforementioned weighting schemes has a significant style bias. Our analysis suggests that their superiority to capitalisation weighting can be explained by better diversification rather than by greater exposure to rewarded risk factors.
|Type :||Publication EDHEC|
|Date :||le 18/04/2011|
|Pôle de recherche||Finance|