{"id":2148483,"date":"2021-06-14T12:44:15","date_gmt":"2021-06-14T07:14:15","guid":{"rendered":"http:\/\/stockviz.biz\/index.php\/?p=2148483"},"modified":"2021-06-14T12:44:36","modified_gmt":"2021-06-14T07:14:36","slug":"synthetic-indices","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2021\/06\/14\/synthetic-indices\/","title":{"rendered":"Synthetic Indices"},"content":{"rendered":"\n<p>Popular indices, like NIFTY 50 &amp; MIDCAP 150, are useful if you are benchmarking long-only portfolios. However, if you have a long-short portfolio, then you need a long-short benchmark.<\/p>\n\n\n\n<p><strong><em>When Are Contrarian Profits Due To Stock Market Overreaction?<\/em><\/strong> (Lo, MacKinlay, 1990) describes a na\u00efve portfolio construction process that is fit for purpose.<\/p>\n\n\n\n<p>For momentum, portfolio weights are in proportion of excess returns over an equal-weighted index and for mean-reversion, they are the inverse.<\/p>\n\n\n\n<p>For example, if you subtract the returns of each of the components of the NIFTY 50 index with the returns of NIFTY 50 EQUAL-WEIGHT index and divide by 50, you end up with the portfolio weights for the next day. Each look-back period used to calculate returns will produce a different set of weights (and a different synthetic index.)<\/p>\n\n\n\n<p>As impractical as constructing such a portfolio may seem, they are useful as a benchmark for long-short mean-reversion\/momentum portfolios. Here are index returns since April 2020 with 20- and 50-day look-backs.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/raw.githubusercontent.com\/stockviz\/blog\/master\/synthetic\/basic\/syn-indices.png\" alt=\"\" \/><\/figure>\n\n\n\n<p>This is especially interesting if you are looking at market dislocations and subsequent recoveries. Here are indices since June 2019 with 5-, 20- and 50-day look-backs.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/raw.githubusercontent.com\/stockviz\/blog\/master\/synthetic\/basic\/syn-indices-all.png\" alt=\"\" \/><\/figure>\n\n\n\n<p>Counter-intuitively, na\u00efve mean-reverting long-short seems to out-perform momentum. <\/p>\n","protected":false},"excerpt":{"rendered":"<p>Popular indices, like NIFTY 50 &amp; MIDCAP 150, are useful if you are benchmarking long-only portfolios. However, if you have a long-short portfolio, then you need a long-short benchmark. When Are Contrarian Profits Due To Stock Market Overreaction? (Lo, MacKinlay, 1990) describes a na\u00efve portfolio construction process that is fit for purpose. For momentum, portfolio &hellip; <\/p>\n","protected":false},"author":2,"featured_media":2106273,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[2761],"class_list":["post-2148483","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-insight","tag-quant","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2148483","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=2148483"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2148483\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media\/2106273"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=2148483"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=2148483"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=2148483"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}