Research Of Non-Capitalization-Weighted Indexation Investment Strategy

The characteristics of indexation investment is that its transaction cost and operation cost is low,and it can get beta return.But in China's stock market,the traditional capitalization-weighted is the main weighting method of the index,and the efficiency of indexation investment is low.And the difference between the indexation investment products is not obvious.In the other hand,the foreign research shows that the non-capitalization-weighted indexation investment can get higher excess return.Therefore,this paper attempts to study the efficiency of non-capitalization-weighted indexation investment in China's stock market.We focus on the analysis of equally-weighted risk contributions index,the anti-capitalization-weighted index and the minimum-variance index.Then we compared the risk and return characteristics of the non-capitalization-weighted indexation investment and the capitalization-weighted indexation investment.At the same time,we try to make some improvements to the non-capitalization-weighted indexation investment.That is,we join a market factor which can warn system risk in the non-capitalization-weighted indexation investment.In this way,the portfolio can avoid part of systemic risk in the stock market,so as to reduce the risk of the portfolio.In this paper,we use the method of principal component analysis and power law to analyze the long tail of the CSI 300 index.And we combine the long tail characteristics of the CSI 300 index with the amount of the transaction amount to warn systemic risk.For this purpose,this paper analyzes the performance of the non-capitalization-weighted indexation investment and the traditional capitalization-weighted indexation investment with the historical data in the China's stock market.And we compare the non-capitalization-weighted indexation investment which joined market factor with non-capitalization-weighted indexation investment which did not join the market factor.Through empirical analysis,we finally get the following conclusions:(1)The performance of traditional capitalization-weighted indexation investment is poor.The performance of portfolio A which tracking the CSI 300 index shows that the return of portfolio A is negative 15.42%.The other indictors of portfolio A are as follows:the max drawdown(absolute value)is 44.89%,the sharp ratio is negative 0.06,the probability of return which is greater than 0 was 7.14%.From the income and risk characteristics of portfolio,we conclude that the performance of traditional capitalization-weighted indexation investment is poor.And its sharp ratio is negative,which means that the average yield of portfolio A is lower than the risk-free rate.(2)The non-capitalization-weighted indexation investment in China's stock market can achieve excess returns,and have a high Sharpe ratio.Empirical results show that the non-capitalization-weighted indexation investment can get a higher excess returns,and its sharp ratio is much higher than the capitalization-weighted indexation investment.We find that the non-capitalization-weighted index can achieve higher returns mainly because it bear the risk factor.Anti-capitalization-weighted index tend to low market value factor,equally-weighted risk contributions index and minimum-variance index tend to low beta factor.(3)The development of non-capitalization-weighted indexation investment can effectively improve the efficiency of the indexation investment,and it is a useful supplement to the traditional capitalization-weighted indexation investment.Non-capitalization-weighted index have rich structural methods,and can be constructed with different risk and return characteristics which can meet the different needs of the investment.(4)In the indexation investment,it can effectively reduce the risk and improve long-term return of the portfolio through join a market factor which can warn system risk in the portfolio.Indexation investment is considered to be an effective way of long-term investment,but it will suffer a great loss when the market occur systemic risk.In this paper,we use the principal component difference method and power law distribution to construct market factor.We found that the market factor can effectively alert the occurrence of systemic risk.It can effectively reduce the risk and improve long-term return of the portfolio through add a market factor in the portfolio.This method have great significance to the investors.Summarizing the above analysis,through the development of non-capitalization-weighted index which have different weighting methods can guide a variety of investment philosophy,and relieve the phenomenon of "homogenization".Also,it can rich the index investment theory and practice,and play a positive role in the spread of risk.The non-capitalization-weighted indexation investment is a useful supplement to the capitalization-weighted indexation investment.