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'De-listed' stocks are another factor - the worst performing stocks are removed from the exchange, giving a higher average. Inflation itself is a very tricky th
by azgolfer 17y ago
'De-listed' stocks are another factor - the worst performing stocks are removed from the exchange, giving a higher average. Inflation itself is a very tricky thing - technology is very deflationary but this is ignored by the market basket.
- chasingsparks 17y agoSurvivorship bias is behind almost every instance of supposed alpha found when running pattern based studies. That and the bid-ask bounce.
- EugeneG 17y agoI don't think that makes a difference. If I am understanding the mechanics of equity indices correctly... The return of the index can be replicated even when stocks get delisted (an investor sells the stock that gets delisted.) When a new stock is added to the index, an investor buys this new stock.
- roundsquare 17y agoIt depends what you are using the index for. If you investing in a mutual fund that is replicating the S&P 500, for example, it doesn't really matter except for transaction costs. If you are using the S&P 500 as your baseline (e.g. to decide if an investment strategy is worth the effort) it doesn't matter at all. If you are using the S&P 500 as a metric about the economy... it might matter. If there is frequent turnover in the composition it might indicate that the market is very volatile... (someone with more knowledge can probably tell me if this is true or not).
- mtpark 17y agoYour latter point is often ignored as inflation numbers are often taken as undisputed (or at least "what can you do about it") figures. There is tremendous bias in the calculation of inflation, although the BLS has done a great job of fixing this in the last decade or so. Unfortunately historical data will be incomparable because of these frequent revisions. See the Boskin Report for more details.