On the Choice of Asset Price Indices: Performance Measurement Versus Asset Class Analysis
25 Pages Posted: 3 Dec 2003
Date Written: November 2003
Asset price indices are widely used in financial economics to measure portfolio performance and analyze asset class attributes such as risk and returns. This paper uses statistical models and numerical examples to illustrate that these two research needs are different and thus demand different indices. The choice of indices has significant economic consequences since indices can differ dramatically under reasonable market conditions, as demonstrated by simulations. This paper proposes a moment-matching criterion to select indices for portfolio performance measurement, and a process-matching criterion to select indices for asset class attributes analysis.
Keywords: Asset price index, choice of indices, performance measurement, asset class attributes analysis
JEL Classification: C43, C52, G10
Suggested Citation: Suggested Citation