On Construction of Robust Composite Indices by Linear Aggregation

Abstract:     
In this paper we construct thirteen different types of composite indices by linear combination of indicator variables (with and without outliers/data corruption). Weights of different indicator variables are obtained by maximization of the sum of squared (and, alternatively, absolute) correlation coefficients of the composite indices with the constituent indicator variables. Seven different types of correlation are used: Karl Pearson, Spearman, Signum, Bradley, Shevlyakov, Campbell and modified Campbell. Composite indices have also been constructed by maximization of the minimal correlation. We find that performance of indices based on robust measures of correlation such as modified Campbell and Spearman, as well as that of the maxi-min based method, is excellent. Using these methods we obtain composite indices that are autochthonously sensitive and allochthonously robust. This paper also justifies simple mean-based composite indices, often used in construction of human development index.

Keywords: Composite index, linear aggregation, principal components, robust correlation, Signum, Bradley, absolute correlation, Shevlyakov, Campbell, Hampel, outliers, mutilation of data

JEL Classifications: C13, C43, C61, C87, C88

Working Paper Series