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ASPI calculation method to be reviewed


The Colombo Stock Exchange (CSE) plans to revise the calculation method of the All Share Price Index (ASPI) by changing the weighting method of the constituents from full market capitalization to float-adjusted market capitalization.

This interview with CSE’s Head of Research and Strategy, Nishantha Hewavithana, provides key insights in that regard.

Q: What is a stock index and its purpose?

A: A stock index is a statistical measure that shows the changes that occur in the stock market. Therefore, an index reflects general market sentiment and the direction of stock market price movements. These indices can be calculated for the whole market (broad market index), a selected segment (sector indices) or based on any other theme (eg dividend index and ESG index). Indices are primarily useful in determining the performance of the market segment, understanding the general direction of the market.

Q: What are the different types of calculation methods?

A: There are different types of calculation methodologies based on different aspects. One of these aspects is the weighting of the constituents of the index.

Two main weighting schemes weight the constituents of the index by the total market capitalization of each constituent and weight the constituents of the index by the float-adjusted market capitalization of each constituent.

Q:What is free float-adjusted market capitalization?

A: This simply means that the total market capitalization is multiplied by the percentage of public ownership. Public participation is the part of the issued quantity of shares readily available to investors and expressed as a percentage. This is calculated by the companies and published in the interim financial statements.

The definition of public holding can be found in the “Content Definitions and Introduction” section under Entry Rules, accessible at cdn.cse.lk.

For example, in a given company, the percentage of public ownership is 19%, which means that only 19% of the amount of issued shares are readily available to go along with general investors.

The remaining 81% is held by strategic investors who cannot be expected to be traded in the general market. Thus, 19% of market capitalization (known as float-adjusted market capitalization) is ready to live together on a daily basis.

Q: What is the ASPI Method Review?

A: The ASPI was calculated on a full market capitalization basis, which means that the constituents of the index are weighted according to the full market capitalization of each security. Alternatively, it could be weighed on float-adjusted market cap.

The revision consists of changing the weighting scheme from full market capitalization to free float-adjusted market capitalization.

Since companies disclose their public holdings quarterly in their interim financial statements, the index weightings would be revised quarterly (known as index rebalancing).

Q: What is the cap and why at 5%?

A: Capping is the technique used in the calculation of the index to solve the problem of the overrepresentation of one of the few stocks in an index.

The index is capped at 5% to solve the problem of overrepresenting one of the few stocks in an index.

Once capped, the excess weight is allocated proportionally among the remaining stocks in the index. The same procedure is repeated until no security exceeds 5% of the ceiling rate.

We calculate the Float ASPI index and cap at different capitalization rates. On a return per unit of risk basis, the 5% cap level was the best.

Q: What prompted the CST to opt for this change?

A: Indices based on float-adjusted market capitalization are better able to generate realistic market returns than those based on total market capitalization because they are based on tradable quantities.

Since the introduction of this idea in the early 2000s, most markets have adopted it in their index calculation methodologies.

All index service providers such as S&P Dow Jones, FTSE use this method and are considered best practice in index calculation methodologies.

Q: What are the advantages and disadvantages of this move?

A: The main advantages of the revised index would be that it would generate more realistic returns and that the index methodology would be consistent with generally accepted best practices in index calculation. There are no downsides.

Q:Will the value of the ASPI index suddenly change due to the implementation of this change itself?

A: No. On the effective date of the methodology review, the ASPI will start moving from the same value it closed on the day immediately preceding the review.

When this methodology revision 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.

1. How will this affect the ASTRI (All Share Total Return Index)?

The All Stock Total Return Index (ASTRI) measures total return (price return + dividend yield).

ASTRI reflects returns due to price changes and dividend income. Following the implementation of ASPI’s revised methodology, the price return component will be based on float-adjusted market capitalization. This means that the ASTRI is also calculated based on the float-adjusted market capitalization

Q:Is the new CSE indexing method publicly available?

A: Yes. It is available on the CSE website.