This series is republished with permission from Market Realist. Editor Peter Barnes of Market Realist interviews two Nasdaq Global Information Services leaders: Dave Gedeon, Head of Research and Product Development, Nasdaq Global Information Services and Tom Dorsey, Founder of Dorsey, Wright & Associates, a Nasdaq Company.
PART 3 OF 18
Market Realist: Can you walk us through your thought process determining themes for the indices, and how those rules are determined?
Dave: Certainly. We first determine the rules for a particular index. If it’s an idea coming from within Nasdaq, the research team tries to identify the goal of the index or what we want to accomplish. We want to have high yielding stocks with a high degree of quality – why is that the goal? What is the benefit? Why is that different from or better than existing strategies? We then start to research what provides high yield and quality, and what brings them together from a return perspective.
There is a lot of data analysis. Across any of the analysts’ screens at any given point will be millions of points of data that they’re parsing and dissecting to understand if this concept is viable, and how it fares through a number of historical market cycles. Does it retain its viability in 2008, 2003, the first half of 2016? We understand that no strategy is going to outperform every single day. We have to take that into consideration when developing strategies.
So, let’s say this example index of high yield and high quality makes sense, it performs based on historical data that we’ve created, and it delivers to expectations, we then start to write the rules of stock selection: do we want to do this weekly? Monthly? Annually? Then, we start to investigate the building blocks of the index methodology: review, rebalancing, capping of any given sector, how sectors are weighted, how corporate actions are handled. From this, we create the index methodology document. Once that document gets published, the index goes live. Then, we apply a back-test based off of that document. We are able to create an accurate reflection of how that methodology would have done in the past using hypothetical back-testing.
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