CSE board approves free float-adjusted market capitalisation basis from January

• Revised index will start moving from same value that it closed on day immediately prior to changes

The board of directors of the Colombo Stock Exchange (CSE) approved the revision of the index calculation methodology of the All Share Price Index (ASPI) at a board meeting held yesterday, to change its calculation basis from full market capitalisation-weighting to free float-adjusted market capitalisation-weighting, with effect from January 2022, following consultations with stakeholders. 

The effective date with the detailed index calculation methodology will be published on the CSE website in due course, the CSE said in a press release. 

The CSE calculates and disseminates its benchmark pricing index - the ASPI and a total return version of it – the All Share Total Return Index (ASTRI). 

The ASPI calculation is based on the total market capitalisation of its constituent companies, as it considers 100 percent of the issued quantity of a company’s shares for the weighting of the index, irrespective of that company’s public holding percentage. 

The ASPI takes into account both voting and non-voting shares of all listed companies. As such, the impact of each security’s price change on the index is presently weighted according to that security’s full market capitalisation.

However, the present methodology does not consider the liquidity and actual tradability of each security. As a result, the current ASPI can reflect movements that are not consistent with the actual price movements experienced by the investors and can be subject to significant volatility based on low volume transactions in shares, with very little free float. 

“Therefore, it was decided to use an alternate methodology – a free float-adjusted index – commonly used by several exchanges that consider only the tradable portion of the issued quantity of securities, also known as the free float shares, for the calculation of indices. In this method, in the index calculation, each security is weighted based on its free float-adjusted market capitalisation,” the statement said. 

“The CSE said it commenced work on revising the index calculation methodology in July 2021. In line with the internationally accepted industry norms, changing a stock exchange’s index methodology requires extensive back testing in order to grasp the impact of the changes. 

Hence, the CSE followed best practice and conducted reasonable amounts of back testing of the ASPI under the revised index calculation methodology on a pro forma basis dating back to December 2013. This analysis has provided a substantial amount of historical index data observations to understand the impact of a change to a new methodology,” it added.

Commenting on this effort, CSE Chairman Dumith Fernando said, “As the governing body of the CSE, we have a responsibility to investors and other market participants in taking due care when implementing significant changes such as a revision of the market index calculation methodology. As a market operator, we cannot rush to make such changes at the cost of prudential management of the market. With the extensive work done over the last few months to back-test the revised index data, the CSE is confident that it has a good understanding of the impact of this proposed revision on the stock market.” 

On the implementation date of the revised index calculation methodology, the ASPI will start moving from the same value that it closed on the day immediately prior to the changes. Therefore, when this methodology revision is implemented, the serial continuity of the index will be maintained and there will be no sudden shift of the index level, solely due to the launch of the new index.