EDHEC-Risk Institute Study Highlights the Inefficiency of Asian Stock Market Indices

Among the key findings of the study:

 All indices analysed display a pronounced lack of efficiency, in the sense of providing an efficient risk-reward trade-off: for all of them, an equal-weighted index constructed from the same components outperforms the corresponding cap-weighted market index. The levels of inefficiency of Asian market indices were found to be quite comparable to those of European and US indices.

 The standard Asian indices are heavily concentrated in a few large-cap stocks. Most indices allocate as much as 60% of the index weight to only one-fifth of the stocks in the universe. For investors who are interested in holding well-diversified equity portfolios, one can see these results as a motivation to explore whether more appropriate alternatives can be developed.

 Asian equity indices show severe fluctuations in style and sector exposures: For example, the weight of Telecom Services stocks in the Hang Seng index fluctuated between less than 10% and 27% over the period analysed. The weight of Consumer Staples stocks in the Indian Nifty Index fluctuated between 3% and 27%. Market indices in more developed countries (Hong Kong, Japan, Singapore, South Korea and Taiwan) demonstrate relatively more stability, whereas market indices in less developed countries (China and India) display higher variability over time in terms of sector allocation.

 The research shows that investors who want to capture the Asian market premium will do so in a better way if they use indices designed with an efficient weighting scheme. In addition to carefully considering their geographic exposure, investors clearly need to consider the weighting scheme that will allow them to extract the equity risk premium for a given geography in the best possible way.