CRSP Launches Investable Indexes

From academics to asset managers, researchers who require high quality data in their workflow rely on historical market data from the Center for Research in Security Prices (CRSP)—the gold standard in the industry. For more than 50 years, CRSP has been the leader in providing research-quality market and index data that underpin groundbreaking research. In November 2010, CRSP introduced the first of 26 real-time investable indexes that reflect the way asset managers invest today, and which provide the foundation for new research products. In late 2011, CRSP prepared to launch 10 new sector indexes and shift its focus to developing value and growth style indexes.

To help construct the new equity indexes, CRSP turned to John C. Heaton, Joseph L. Gidwitz Professor of Finance, and Lubos Pastor, Charles P. McQuaid Professor of Finance and Robert King Steel Faculty Fellow, who shared the story behind how the groundbreaking products were created. The indexes blend advancements in academic research with current commercial practice. Offering a new approach to banding and migration, the indexes minimize turnover while retaining style purity.

How did you get involved with the CRSP index project?

Heaton: I'm on the CRSP board, and [CRSP executive director and Chicago Booth alumnus] David Barclay, and I have talked extensively about asset pricing and the need for new indexes from CRSP. The CRSP index project is related to my research not only in asset pricing, but also portfolio allocation.

Pastor: I teach a course in portfolio management, and I welcomed the opportunity to work on a project related to what I teach. I often debate with my students the merits of active versus passive management. The CRSP indexes should be of interest to both active and passive money managers.

How do the new CRSP indexes differ from CRSP's existing index products?

Pastor: They are high-frequency indexes that will be updated every second, whereas the highest frequency that has been available at CRSP is daily. CRSP also will offer value and growth style indexes for the first time.

Heaton: And they're investable. The current ones are not. The current CRSP indexes are constructed in deciles and there's no worry about migration or trading costs. In the new indexes we move stocks more smoothly across indexes, making them much more practical for trading.

Pastor: We made these indexes easy to track by money managers, meaning a money manager can create a fund that mimics the performance of the CRSP indexes at a low cost.

How are the new CRSP indexes different from the indexes of other index providers and what makes CRSP's new indexes unique?

Heaton: With the new CRSP indexes, we're sorting the eligible universe by market capitalization and assigning securities to the appropriate indexes according to their market cap. In a way, that's different and more robust than some of the current index providers. Some providers assign a fixed number of securities to an index, others selectively choose securities for an index based on what they are trying to represent. But it's important that the new CRSP indexes don't deviate too much from common practice, because we are trying to make something that is practical.

The way we think about migrating securities across indexes is different. We tried to create an index where there's not a lot of churning, and there's not necessarily a lot of trading. At Booth, when we think about mutual fund performance, we think that indexing is great and you ought to minimize cost. That's what these indexes are meant to do. That's a really important feature.

Pastor: We've come up with a different way to do migration. Our approach relies on the concept of "packeting." When a security crosses a band separating two indexes, we migrate 50 percent of the company's holdings—a "packet"—to the adjacent index. If a security just barely crosses into the neighboring index territory so that it's still within the band, we don't migrate anything. This "packeting" approach reduces churning and trading costs.

Packeting will be used with the market cap indexes as well as with the value/growth style indexes. The value/growth style indexes will use insights from research, some of it done here at Booth, to design value versus growth dimensions that are different from other providers. The value and growth dimensions will be defined by multiple value and growth factors. Compared to other indexes, we will allocate stocks differently, and we will migrate them differently from one index to another.

How will the new CRSP indexes change what researchers will be able to do? And what new type of research products will be available?

Pastor: It will be easier than ever before to work with high-frequency return data at the index level. So, I expect it will be easier for us to analyze issues related to market liquidity. Liquidity has become an interesting research topic; people want to understand how prices move at very high frequencies as opposed to analyzing monthly or annual price data.

Heaton: Research in performance evaluation is very important. The world of investing has evolved. People now ask, "Why are we paying such large fees when we don't really get diversification or improved returns?" I think there's going to be more emphasis on index investment as a way to minimize fees so the new investable indexes will be useful from a research perspective because they provide strategies that investors can actually implement.

Also, as more questions are asked about performance, we'll have a set of indexes that provide a good set of benchmarks. For example, we'll have off-the-shelf indexes with style delineated on value growth dimensions in a way not available in other easily accessible academic indexes.

We'll be exploiting CRSP's advantage in the academic market, so we'll have a set of indexes to go along with that advantage. CRSP is running these indexes internally, so we have access to all the data behind them in order to produce new and interesting research products. Data products may include things like corporate actions, quarterly performance, and some of the high-frequency data I mentioned like price, number of trades, and volume at the security level.

It seems like this is a unique opportunity—to have access to new CRSP data and to be able to see your theory in practice. Is this different from what faculty do at other schools?

Heaton: CRSP itself is unique, so we have a unique opportunity because we have CRSP, an academic data provider—the first, the biggest, the most well-known, the most respected. CRSP data has a long history and is checked and validated by researchers in a way that a lot of commercial data is not. The unique opportunity is here because of CRSP and we're building on it. So, that's what's different about this place.

Pastor: There's nothing like CRSP.

Heaton: It's the gold standard.

Edited from an article by Patricia Houlihan and Diane Treuthart that appeared in the winter 2011 issue of Chicago Booth Magazine.