Risk-Based Indexation

29 Pages Posted: 1 Apr 2010 Last revised: 29 Jan 2011

Paul Demey

Lyxor Asset Management

Sébastien Maillard

Lyxor Asset Management

Thierry Roncalli

Amundi Asset Management; University of Evry

Date Written: March 20, 2010

Abstract

A capitalization-weighted index is the most common way to gain access to broad equity market performance. These portfolios are generally concentrated in a few stocks and present some lack of diversification. In order to avoid this drawback or to simply diversify market exposure, alternative indexation methods have recently prompted great interest, both from academic researchers and market practitioners. Fundamental indexation computes weights with regard to economic measures, while risk-based indexation focuses on risk and diversification criteria. This paper describes risk-based indexation methodologies, highlights potential practical issues when implemented, and illustrates these issues as it applies to the Euro Stoxx 50 universe.

Keywords: Risk-Based Indexation, Fundamental Indexation, Market Capitalization, Equity Indexes, Diversification, Portfolio Optimization, Robust Estimation

JEL Classification: G11, C60

Suggested Citation

Demey, Paul and Maillard, Sébastien and Roncalli, Thierry, Risk-Based Indexation (March 20, 2010). Available at SSRN: https://ssrn.com/abstract=1582998 or http://dx.doi.org/10.2139/ssrn.1582998

Paul Demey

Lyxor Asset Management ( email )

Paris
France

Sébastien Maillard

Lyxor Asset Management ( email )

Paris
France

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

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