Allocation Characteristics of Index Weighting Schemes
23 Pages Posted: 25 Nov 2014 Last revised: 6 Apr 2017
Date Written: April 6, 2017
This study sheds light on the entanglement of index weighting schemes. We show that a high degree of absolute holdings overlap is not a sufficient measure of the level of conformity with a benchmark. Secondly, we take a closer look at portfolio concentration and market contagion, and monitor a pattern where index weighting schemes experience highly correlated returns after 2008, alongside a drop in relative portfolio holdings overlap during periods of increased market volatility. We are able to show that portfolio concentration is caused by a 'flight to familiarity' and as such, the impact of market contagion is largely consistent across alternative index weighting schemes.
Keywords: enhanced indexing, full replication, sampling, holdings overlap, Bray-Curtis dissimilarity, dynamic norm constraints
JEL Classification: G11
Suggested Citation: Suggested Citation