April 26, 2012
Free float adjustment's evolving role
Indices have developed immensely from being mere mirrors to the market to become tools that guide, with varying degrees of precision, the investment strategies used in the management of vast quantities of assets. Providers must remain alert to any potential market consequences arising from changes to their rules.
If the use of divisors or, for some indices, price adjustment factors, were the major original innovations in the construction of capitalisation-weighted indices, the use of free float both as a liquidity management tool and an eligibility tool surely ranks second. The role of free float adjustment will continue to evolve as indices develop, but to date it has greatly helped in improving the usability of indices.
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