Constructing a GDP-Based Index for Use as Benchmark
Wilmott Journal, Forthcoming
20 Pages Posted: 30 Oct 2009
Date Written: October 28, 2009
The gross domestic product [GDP] is a fundamental economic indicator that is frequently used as a benchmark for local equity indices. The widespread appeal of this association is understandable because an equity index, especially if broad, could, like the GDP, also manifest the state of the economy. At the same time, however, the validity of a direct relation between the two is debatable since the GDP is known to be characteristically different from the typical equity index, however broad. In this work, we review some of the key elements that separate the GDP from a typical broad equity index in order to explain why the two cannot be compared directly with each other. We then incorporate a readily available mapping technique to create a GDP-based index that circumvents their inherent disparities and, thus, enable us to benchmark one against the other.
Keywords: GDP, benchmark, equity index, equity duration, relative valuation
JEL Classification: Z00
Suggested Citation: Suggested Citation