How does NIFTY 50 work?

NIFTY 50 is based upon solid economic research. A trillion calculations were expended to evolve the rules inside the NIFTY 50 index. The results of this work are remarkably simple: (a) the correct size to use is 50, (b) stocks considered for the NIFTY 50 must be liquid by the ‘impact cost’ criterion, (c) the largest 50 stocks that meet the criterion go into the index. NIFTY 50 is a contrast to the adhoc methods that have gone into index construction in the preceding years, where indices were made out of intuition and lacked a scientific basis. The research that led up to NIFTY 50 is well-respected internationally as a pioneering effort in better understanding how to make a stock market index. See “Market microstructure considerations in index construction” by Ajay Shah and Susan Thomas, CBOT Research Symposium Proceedings, Summer 1998, page 173-193.

 

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