Reconstructing Russell 2000 Returns from Historical Constituents

Summary

The document asks how to reproduce Russell 2000 performance by summing the market capitalizations of historical index constituents, and why that proxy returns more than Bloomberg’s benchmark. It points out that corporate events must be handled when calculating daily index changes: compare aggregate capitalization using current shares and prices across adjacent days, then adjust for the resulting capitalization change so corporate actions do not appear as market returns.

The author reports that this adjustment removes jumps but does not resolve the excess return. The discussion therefore identifies an important index-reconstruction issue without establishing a complete solution. It gives no final diagnosis, benchmark comparison details, or divisor time series source. Researchers should treat the proposed adjustment as a partial method and investigate other index conventions and data inputs before attributing the remaining discrepancy.

Key ideas

• Summing constituent market capitalizations alone may not reproduce an index return series.
• Corporate events can create artificial jumps unless capitalization changes are adjusted.
• Comparing capitalization across days with current share counts and prices can help isolate corporate-action effects.
• Removing those jumps may not eliminate a persistent difference from the benchmark.

Tags

# reconstructing Russell 2000 returns


# reconstructing Russell 2000 returns












I have a historical list of index components, so I'm just adding up market caps of those to get a proxy for the index. However, when I check it against Bloomberg, my returns are consistently higher - is there anything else I'm missing? Alternatively, is there a way to get index divisor timeseries from some source?

UPDATE: Thanks to @MatthewGunn for pointing it out: one has to account for the corporate events: on a given day I can compare the total market cap using today float and today's vs yesterday's prices and use this ratio to adjust the overall market cap. That removes jumps in index return series, but still getting much higher returns that the benchmark. Is there anything else I should be aware of?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.