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Transformation weighted indexes offering concentrated multi-risk factor exposure

a technology of multi-risk factor exposure and weighted indexes, applied in the field of transformation weighted indexes offering concentrated multi-risk factor exposure, can solve the problems of inability to replicate current methods, and achieve the effect of reducing overexposure and simplifying portfolio managemen

Inactive Publication Date: 2014-04-17
GRAHAM INVESTMENT MANAGEMENT INC
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  • Summary
  • Abstract
  • Description
  • Claims
  • Application Information

AI Technical Summary

Benefits of technology

This patent describes a system and method for creating indexes for securities using risk factor metrics. The system uses transformations such as binary, inverse, linear, log, percentile, power, rank, root, and variance-stabilization to transform the data into a standardized form. The system can combine both numeric and non-numeric data to create new composite indexes. The advantages of the system include using both fundamental and market data, incorporating both numeric and non-numeric data, and shaping weighting percentage curves. The system also mitigates overexposure to poor securities and underexposure to excellent securities. The use of power transformations allows for larger or smaller differentials in the highest / lowest-weighted members. Overall, the system creates indexes that provide broader diversification and practical implementation.

Problems solved by technology

In other words, the weighting percentage curve is gradually and consistently sloped rather than horizontal, which current methods are unable to replicate.

Method used

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  • Transformation weighted indexes offering concentrated multi-risk factor exposure
  • Transformation weighted indexes offering concentrated multi-risk factor exposure
  • Transformation weighted indexes offering concentrated multi-risk factor exposure

Examples

Experimental program
Comparison scheme
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example 1

TWI Characteristics

[0099]A percentile transformation is applied to a notional risk factor metric for a set of 1000 securities.

[0100]Table 4 shows a sampling of percentiles at either end of the 1000-member index with weighting percentages calculated by dividing a given percentile by the sum of the percentiles for each index constituent with respect to a notional metric.

TABLE 4Percentiles of a 1000 member index of marketable securities;weighting percentage determined by dividing percentileby aggregate of all index member percentilesWeightingWeightingPercentiles,Percentage,Percentiles,Percentage,Top 10Top 10Bottom 10Bottom 101.00000.2003%0.00900.0018%0.99800.1999%0.00800.0016%0.99700.1997%0.00700.0014%0.99600.1995%0.00600.0012%0.99500.1993%0.00500.0010%0.99400.1991%0.00400.0008%0.99300.1989%0.00300.0006%0.99200.1987%0.00200.0004%0.99100.1985%0.00100.0002%0.99000.1983%0.00000.0000%

[0101]FIG. 3 depicts the graphical appearance of a percentile-based weighting percentage curve compared wit...

example 2

TWI Construction

[0106]In this example, three TWIs are derived from a 1000-stock universe selected by highest market capitalization.

[0107]A first Transformation Weighted Index, TW-1, may directly access three risk factors: low volatility, value, and momentum. TW-1 may also provide inherent exposure to the size and market factors. For each stock, percentiles of the following metrics may be multiplied: Shareholder Equity for the most recent quarter (a value risk factor), four-quarter Share Price Change (a momentum risk factor), and a twelve-month exponentially weighted average Beta (a volatility risk factor; here the percentile may be subtracted from 1.00 to emphasize low volatility stocks). To this product, a subsequent percentile-power transformation may be applied, using an exponent of two, to produce a weighting value. An investor may consider most relevant benchmark to be an equal weighted index because of TW-1's relatively similar investment capacity and constituent weighting per...

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Abstract

Computer-based systems, software, and computer-implemented methods for creating an index of securities based upon various data transformations of risk factor metrics regarding entities or securities associated with the entities and weighting each index member in proportion to its combined transformed weighting value.

Description

CROSS-REFERENCE TO RELATED APPLICATIONS[0001]This application claims the benefit of U.S. Application Ser. No. 61 / 695,919, filed Aug. 31, 2012, and is a continuation of U.S. application Ser. No. 13 / 757,197, filed Feb. 1, 2013, each of which is hereby incorporated by reference in its entirety.BACKGROUND OF THE INVENTION[0002]In finance, an index is a statistical aggregate that usually refers to a measure of economic performance or market performance. For example, a stock market index is a method of measuring the value of a section of the stock market. Investors sometimes use stock indexes to describe market conditions, to benchmark investment results, or to construct portfolios. Index construction methodologies generally determine the relative contribution of each member to the overall index using equal weighting or some measure of market or fundamental data. Portfolios based on such indexes suffer from numerous disadvantages. For instance, in indexes weighted by market capitalization...

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 LUCAS, IANMENDOZA, CHRISTOPHER
Owner GRAHAM INVESTMENT MANAGEMENT INC
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