Revision of the methodology for calculating the All Share Price Index from the base of the total market capitalization to the base of the adjusted free float market capitalization – Adaderana Biz Français
The Colombo Stock Exchange (CSE) Board of Directors approved the revised methodology for calculating the All Share Price Index (ASPI) at a Board meeting held on 15e November 2021 to change its basis of calculation from full market capitalization weight to a free float adjusted market capitalization weight with effect from January 2022 after consultation with stakeholders.
The effective date with the detailed index calculation methodology will be published on the CSE website in due course.
The Colombo Stock Exchange (CSE) calculates and disseminates its benchmark price index – the All Share Price Index (ASPI) – and a total return version of it – the All Share Total Return Index (ASTRI). The calculation of the ASPI is based on the total market capitalization of the companies that compose it, as it considers 100% of the issued quantity of a company’s shares for the weighting of the index, regardless of the percentage of ownership public service of this company. The ASPI takes into account both shares with voting rights and shares without voting rights of all listed companies. Thus, the impact of the variation in the price of each security on the index is currently weighted according to the total market capitalization of this security.
However, the current methodology does not take into account the liquidity and actual negotiability of each security. As a result, the current ASPI may reflect movements that are not consistent with the actual price movements experienced by investors and may be subject to significant volatility due to low volume trades in stocks with very little float. Therefore, it was decided to use an alternative methodology – a free float-adjusted index – commonly used by several exchanges which only considers the tradable part of the quantity of securities issued, also known as free-float shares, for the calculation of indices. In this method, in the index calculation, each security is weighted according to its free float-adjusted market capitalization.
The CSE began revising the index calculation methodology in July 2021. In accordance with internationally accepted industry standards, changing the index methodology of an exchange requires extensive testing in order to capture the impact of changes. Therefore, the CSE followed best practices and performed a reasonable number of post-tests of the ASPI under the revised index calculation methodology on a pro forma basis dating back to December 2013. This analysis provided a substantial amount. observations of historical index data to understand the impact of a change to a new methodology.
In addition to the ASPI, the CSE calculates and disseminates a total return version of it, namely the Equity Total Return Index (ASTRI). Global financial data provider Standard & Poor (S&P) calculates and disseminates a series of GICS Industry Group indices of companies listed on the CSE. The ASTRI and GICS indices would also be converted to a free float market capitalization basis simultaneously and all back-testing work has been meticulously completed for these indices as well.
Commenting on this effort, CSE President Dumith Fernando said: “As the governing body of the CSE, we have a responsibility to investors and other market participants to exercise caution when implementing significant changes such as a review of the methodology for calculating the market index. . As a market operator, we cannot rush to make such changes to the detriment of prudential management of the market. With the extensive work done over the past few months to post-test the revised index data, the CSE is confident that it has a good understanding of the impact of this proposed revision on the stock market. “
On the implementation date of the revised index calculation methodology, the ASPI will begin to deviate from the same value as it closed on the day immediately preceding the changes. Therefore, when this methodological review is implemented, the serial continuity of the index will be maintained and there will be no sudden change in the level of the index solely due to the launch of the new index.