Revisiting Stock Market Index Methodology

Abstract

Stock market indices play a central role in portfolio and risk management, performance evaluation, and academic research. This paper provides a systematic review and discussion of the main issues in index construction, taking into account thinly traded stock markets and historical settings with a deficiency of information. The main methods to deal with missing price observations are presented and analyzed. Overall, the analysis implies that index construction methodology can have an impact on the index, its tractability as well as its statistical properties especially on thinly traded stock markets.

Keywords: index methodology, stock market index, thin trading, financial history

JEL Classification: C43, C81, N20