Implications of Index Construction Methodologies for Price and Dividend Indices

50 Pages Posted: 16 Jan 2013 Last revised: 17 Jul 2013

See all articles by Georg Cejnek

Georg Cejnek

ZZ Vermögensverwaltung GmbH; Engelbert Dockner Stiftung

Otto Randl

Vienna University of Economics and Business

Date Written: July 17, 2013


Investment products tracking the performance of equity indices have become irreplaceable in the investment community. We are the first to analyze the impact of index replacements and the choice of indexing methodologies on relative performance of both, price and dividend indices. We implement an empirical case study as well as an extensive simulation study incorporating mean reversion and momentum in the process for price-to-dividend ratios. Calibrating our model to capital-market dynamics, we find that periodically rebalanced market-capitalization weighted indices are outperformed by buy-and-hold portfolios and also by fundamentally weighted indices. Rebalancing affects dividend indices more adversely than price indices. We also highlight sensitivities of performance dispersion between different index methodologies by varying mean reversion and momentum parameters. Mean reversion dominates momentum as the driving force in our setup. For a large-cap index comprising 50 stocks, mean reversion found in European stock data lowers the price index by about 10 basis points p.a. and the dividend index by about 25 basis points p.a. relative to a buy-and-hold portfolio. We identify index size, rebalancing frequency and criteria applied to assign weights as key variables affecting the relative performance of price and dividend indices. As a consequence, choosing an index methodology can be considered as an active strategy.

Keywords: index performance, index selection and rebalancing rules, equity indices, dividend indices, fundamental indexation

JEL Classification: G10, G11, G17

Suggested Citation

Cejnek, Georg and Randl, Otto, Implications of Index Construction Methodologies for Price and Dividend Indices (July 17, 2013). Available at SSRN: or

Georg Cejnek (Contact Author)

ZZ Vermögensverwaltung GmbH ( email )

Coburgbastei 4, Top5
Vienna, 1010
+43151818934 (Phone)

Engelbert Dockner Stiftung ( email )


Otto Randl

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020

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