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Journal of Asset Management

, Volume 7, Issue 1, pp 69–80 | Cite as

Analysing digits for portfolio formation and index tracking

  • Peter N Posch
  • Welf A Kreiner
Paper

Abstract

A general methodology is proposed for using digit distributions as an approach to examining arbitrary datasets. With the Newcomb–Benford law as a starting point, a more general framework for digital analysis is developed. A new measure is proposed based on this framework, namely the Digital-Fit Factor (DFF). The use of index comparison on the S&P500 and the Dow Jones Industrial Average is demonstrated. The DFF is then used to construct portfolios and measure their performance compared with that of the index. The average returns using the measure exceed the index composition by 6–14 percentage points per year by being more stable at the same time. Furthermore, these measures require only a very small proportion of the available information and are thus very efficient.

Keywords

stock market index digital analysis Newcomb–Benford law 

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Copyright information

© Palgrave Macmillan 2006

Authors and Affiliations

  1. 1.Department of Finance. University of UlmUlmGermany

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