The Distortion And Amendment Of Shanghai Composite Index

Stock index is used to indicate the risk of stock market and measure stock market as a whole. As a consequence, the investors can make investment strategies based on stock index. But now the "distortion" phenomenon of Shanghai Composite Index has become more and more serious, which is reported by many published and referred as the "phenomenon of two-eight"and "good index performance does not mean making money". In this situation, the Shanghai Composite index doesn't fully characterize market any more. This "distortion"phenomenon would affect the normal and orderly development of the stock market. On the one hand, the distortion of the Shanghai Composite Index will mislead the technical analysis of investors, they may make a departure from the facts or even make a wrong decision. On the other hand, index distortion will seriously misguide the market supervision, or even mislead the decision of the economic policies. Therefore, it is significant to amend the calculation of the Shanghai Composite IndexThere are two important aspects to calculate the index: how to set up the weight and how to choice the constituent stocks of the index. This paper focus on the adjustment of the weight. Under the existing method of calculating the Shanghai Composite Index, the weight just consider the market capacity. The method of this paper also takes into account several other factors, including the liquidity of the stock and the dispersion of industry. The weight is a prior function of the three factors: the liquidity of the stock, the market capacity and the industry dispersion. However, it is very difficult to measure these three variables directly. So in this paper, we need select some appropriate alternative variables to measure the three factors. In the last part of the paper, we use the new method of calculate the Shanghai Composite Index from May 30, 2007 to Oct 16 2007. Compared with the original Shanghai Composite Index, the method of this paper is better to reflect the real trend of the stock market.