Construction of composite indices in presence of outliers

Sudhanshu Mishra ()

MPRA Paper from University Library of Munich, Germany

Abstract: Effects of outliers on mean, standard deviation and Pearson’s correlation coefficient are well known. The Principal Components analysis uses Pearson’s product moment correlation coefficients to construct composite indices from indicator variables and hence may be very sensitive to effects of outliers in data. Median, mean deviation and Bradley’s coefficient of absolute correlation are less susceptible to effects of outliers. This paper proposes a method to obtain composite indices by maximization of the sum of absolute Bradley’s correlation coefficients between the indicator variable and the derived composite index.

Keywords: Composite index; Principal Components analysis; absolute; Bradley’s correlation coefficient; outliers; median; mean deviation; Differential Evolution; global optimization (search for similar items in EconPapers)
JEL-codes: C01 C43 C61 (search for similar items in EconPapers)
Date: 2008-05-26
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https://mpra.ub.uni-muenchen.de/8923/1/MPRA_paper_8923.pdf revised version (application/pdf)

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