Methodology and Process For Constructing Factor Indexes

a factor index and index technology, applied in the field of index construction, can solve problems such as the inability to track factor returns well

Inactive Publication Date: 2013-12-12
AXIOMA
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  • Summary
  • Abstract
  • Description
  • Claims
  • Application Information

AI Technical Summary

Problems solved by technology

During times of high volatility, it is often impossible to track factor returns well and simultaneously manage index turnover and maintain factor neutrality to other factors.

Method used

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  • Methodology and Process For Constructing Factor Indexes
  • Methodology and Process For Constructing Factor Indexes
  • Methodology and Process For Constructing Factor Indexes

Examples

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Embodiment Construction

[0041]Non-optimized factor indexes normally hold a large number of names and experience large turnover. FIG. 1A shows a graph 102 of the monthly, one-way, single-side turnover for a simple 35% cap-weighted, long-short momentum index based on a large cap universe from January 1995 through June 2009. FIG. 1B shows a similar graph 150 for a small cap universe. The lines 110 and 160 indicate the turnover of the long side, and the lines 120 and 170 show the turnover of the short side. On average, the monthly turnover is 20% for each side. However, the small cap results have annual spikes in turnover associated with an annual reconstitution of the small cap universe itself. This level of turnover is undesirable both for long term and short teen investment purposes.

[0042]Furthermore, non-optimized indexes often also exhibit strong exposure tilts in other important systemic factors. FIGS. 2A and 2B show graphs 200 and 250 for the price-to-book ratio, a common metric of value, for a simple 3...

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Abstract

Approaches to the construction of indexes are addressed wherein a portfolio of securities such as stocks, bonds, or the like and their associated investment weights or shares is generated. Indexes can be used as investment tools in various ways. For instance, indexes comprising a plurality of securities can often be bought and sold more cheaply than buying and selling the individual constituents of the index. This pricing differential allows investment with reduced transaction costs. Alternatively, in passive and enhanced indexing, investments are made with reference to an index. Performance statistics such as return and risk are reported with respect to the reference index. Factor indexes can serve as active manager benchmarks or the underlyers for investable products such as exchange traded funds and mutual funds. Computer based systems, methods and software are addressed for constructing indexes that replicate the returns of a quantitative factor such as medium term momentum or value. Further, processes and methodology are described by which the index can have the best possible replication of the underlying factor returns as well as other desirable characteristics. The methodology provides an approach to determine the index even when all desirable characteristics of the index are not simultaneously achievable.

Description

[0001]The present application is a divisional of U.S. application Ser. No. 12 / 958,778 filed Dec. 2, 2010 and claims the benefit of U.S. Provisional Patent Application Ser. No. 61 / 265,910 filed Dec. 2, 2009, which are incorporated by reference herein in their entirety.FIELD OF INVENTION[0002]The present invention generally relates to the construction of indexes wherein a portfolio of securities such as stocks, bonds, or the like and their associated investment weights, allocations, or shares are determined. The present invention relates more particularly to improved computer based systems, methods, and software for constructing factor indexes that replicate the returns associated with a quantitative factor such as medium term momentum or value.BACKGROUND OF THE INVENTION[0003]Indexes can be used as investment tools in various ways. For instance, indexes comprising a plurality of securities can often be bought and sold more cheaply than buying and selling the individual constituents o...

Claims

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Application Information

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Patent Type & Authority Applications(United States)
IPC IPC(8): G06Q40/06
CPCG06Q40/06
Inventor RENSHAW, ANTHONY A.
Owner AXIOMA
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