Custom Indices - Best way to calculate?

[cashonly]

I'm looking to create a custom index. Basically a sector index of stocks that I choose.

What would be the best or most accurate way to do that type of index from the standpoint of component weighting?

No weighting: I could have each component in the index have equal value.

Market Cap weighting: The weighting of a stock would be as a percent of the market cap of that stock to the total of the market cap of all stocks in my custom index.

Volume traded weighting: The weighting of a stock would be as a percent of the avg number of shares traded on a daily basis of that stock to the total avg number of shares traded on a daily basis of all stocks in my custom index. This could be re-calced daily to give more weighting to stocks that pick up in activity.

Avg Value traded weighting: The weighting of a stock would be as a percent of the avg value traded (as calculated by avg daily shares * most recent closing price) on a daily basis of that stock to the total avg value traded on a daily basis of all stocks in my custom index. This could be re-calced daily to give more weighting to stocks that pick up in activity.

This is what I've thought of so far. Which of these sould most representative of an index? Or does someone have a better way for a custom index.

My calculations would be done in Excel or something similar.

Cash

 

[nononsense]

Ask Don.

 

[cashonly]

bump

 

[erierambler]

It appears not many are doing this. Go for it.

erie

 

[rosy]

you can look how dow, sp, or etfs create baskets. i think you definitely need a weighting of some kind. perhaps based of daily returns.

 

[riskarb]

I quote baskets with the top five tickers based [for inclusion] upon market cap, but the baskets aren't weighted. I don't know why anyone would want to replicate an ETF when the math is done at the exchange.

My chip basket leads the SOX quite well.

 

[IV_Trader]

Quote from cashonly:

I'm looking to create a custom index. Basically a sector index of stocks that I choose.

What would be the best or most accurate way to do that type of index from the standpoint of component weighting?

No weighting: I could have each component in the index have equal value.

Market Cap weighting: The weighting of a stock would be as a percent of the market cap of that stock to the total of the market cap of all stocks in my custom index.

Volume traded weighting: The weighting of a stock would be as a percent of the avg number of shares traded on a daily basis of that stock to the total avg number of shares traded on a daily basis of all stocks in my custom index. This could be re-calced daily to give more weighting to stocks that pick up in activity.

Avg Value traded weighting: The weighting of a stock would be as a percent of the avg value traded (as calculated by avg daily shares * most recent closing price) on a daily basis of that stock to the total avg value traded on a daily basis of all stocks in my custom index. This could be re-calced daily to give more weighting to stocks that pick up in activity.

This is what I've thought of so far. Which of these should most representative of an index? Or does someone have a better way for a custom index.

My calculations would be done in Excel or something similar.

Cash

what are your objectives ? To mimic already existing index ? Then you should do the weight the same way ( and concentrate only on adding/excluding components/stocks) .

 

[IV_Trader]

Quote from riskarb:

I quote baskets with the top five tickers based [for inclusion] upon market cap, but the baskets aren't weighted. I don't know why anyone would want to replicate an ETF when the math is done at the exchange.

My chip basket leads the SOX quite well.

B , SPX and Russel ( classifications) are using diff stocks and weighting methods when creating similar sectors/industries/indices. The ability to create a custom index is very popular with some WS participants.

 

[cashonly]

Quote from IV_Trader:

what are your objectives ? To mimic already existing index ? Then you should do the weight the same way ( and concentrate only on adding/excluding components/stocks) .

It's more to create indices of specific sub-industries that don't already have an index. For example an athletic shoes IDX would have NKE, RBK, FL, and some others.

 

[cashonly]

Quote from riskarb:

My chip basket leads the SOX quite well.

That sounds like money in the bank. Is it equal weighted or is it mkt cap based? (or something else?) do you trade SMH based on it?