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Abstract
The objective of this paper is to provide an overview
of indices, index calculations and challenges in designing
an index calculation engine. Financial indices are numbers
that measure the change in price movements of stocks,
bonds and other forms of investments, and are meant
to capture the overall behavior of a market. Indices
are used as performance benchmarks, proxies of market
behavior and as the basis for certain instrument classes.
Indices are used by a wide array of users that includes
Fund Managers, Brokers, and General public.
An index can be constructed in three
main different ways. These are Simple Average, Price-weighted,
and Market-Capitalization weighted. Leading indices
across the world follow one of the above-mentioned methods,
sometimes with subtle variations.
Index maintenance is a time consuming
process. It includes monitoring and completing the adjustments
for corporate actions on an index value.
An Index Calculation Engine (ICE)
performs the complex logic of deriving and maintaining
an index (indices). It uses market data, reference data
and business rules built within itself. It publishes
the index values at periodic intervals to the external
world. The users of Index Calculation engine include
data vendors and index providers.
The challenges involved in designing
an ICE are manifold. The sheer number of indices across
the markets and the need to customize and create new
indices all the time warrants a modular and flexible
approach in design. Calculation intervals have reduced
from 60 seconds to 15 seconds these days. Global trading
and market integration mean that cross-currency normalization
and time zone factoring need to be done in the optimal
fashion.
The importance of data quality and
management can never be over emphasized. Cross-validating
multiple vendor feeds, checking for bad prices &
large price movements, and threshold checking on Foreign
Exchange rates are some of the validations that need
to be performed. Professionals in the competitive world
of investments are continuously demanding the ability
to customize index engines, so that they can delve deep
and analyze specific markets and sectors. Flexibility
in terms of publishing the index is also desirable.
Authors
Barath Narayanan
Rajeev Mukundan
Rohan Dedhia
To know more about Wipro in finance, go to www.wipro.com/finance
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