Empirical Examination of Fundamental Indexation in the German Market

Max Mihm ()
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Max Mihm: Department of Finance, Dresden University of Technology

Chapter 5 in Operations Research Proceedings 2008, 2009, pp 27-32 from Springer

Abstract: Summary Fundamental Indexation is the name of an index methodology that selects and weights index constituents by means of fundamental criteria like total assets, book value or number of employees. This paper examines the performance of fundamental indices in the German equity market during the last 20 years. Furthermore the index returns are analysed under the assumption of an eficient as well as an ineficient market. Index returns in eficient markets are explained by applying the three factor model for stock returns of [2]. The results show that the outperformance of fundamental indices is partly due to a higher risk exposure, particularly to companies with a low price to book ratio. By relaxing the assumption of market eficiency, a return drag of capitalisation weighted indices can be deduced. The index methodology implies an investment strategy that benefits from well known market anomalies like the value effect without relying on active portfolio management. Furthermore under the assumption of an ineficient market there is an added value of fundamental indices.

Keywords: Total Asset; Systematic Risk; Sharpe Ratio; Weighted Index; Index Return (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-642-00142-0_5

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DOI: 10.1007/978-3-642-00142-0_5

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