Constructing a GDP-based
Index for Use as a Benchmark
Ruben
D. Cohen (e-mail)
The
gross domestic product [GDP] is a fundamental economic indicator that is
frequently used as a benchmark for local equity indices. The widespread appeal of this association is
understandable because an equity index, especially if broad, could, like the GDP,
also manifest the state of the economy.
At the same time, however, the validity of a direct relation between the
two is debatable since the GDP is known
to be characteristically different from the typical equity index, however
broad.
In this work, we review some of the key elements that
separate the GDP from a typical broad equity index in order to explain
why the two cannot be compared directly with each other. We then incorporate a readily available
mapping technique to create a GDP-based index that circumvents their
inherent disparities and, thus, enable us to benchmark one against the other.
