1
$\begingroup$

My question is rather specific but I'm wondering if someone might be able to help.

In the Solvency 2 framework, the equity capital charge requires to compute a symmetric adjustment which is itself computed as the difference between the current value of an equity index and its average over the last 36 months (1).

These values are published on the regulator's website (2) every month but I have to replicate it. The equity index mentioned above is a composite of 11 indices with the following weights, applied on normalized values of the price indices:

  • AEX Index -> 14%

  • CAC Index -> 14%

  • DAX Index -> 14%

  • ASX Index (FTSE All-Shares) -> 14%

  • FTSEMIB Index -> 8%

  • IBEX Index -> 8%

  • NKY Index (Nikkei) -> 2%

  • OMX Index -> 8%

  • SPX Index -> 8%

  • SMI Index -> 2%

  • WIG30 Index -> 8%

If I follow all the steps outlined in the EIOPA document published monthly (picture below), I get an almost perfect match for the first few dates after the date used for normalization and then my calculation and the one published start to diverge more and more (as shown in the picture below).

enter image description here

Steps as outlined in the EIOPA document published monthly

My guess is that there might be dividends coming in play and that might be the reason of this growing discrepancy. However I am not sure how to correct this.

I download data from Bloomberg (field PX_LAST) and the EIOPA documentation states that price indices should be used (not total return indices).

Thanks !

$\endgroup$
  • $\begingroup$ My initial guess was timing issues w.r.t. SPX or NKY, but that would generate 1 period, transient error rather than persistent divergence. If it were me, I'd write code to replicate every calculation of the EIOPA they put on the website then look at the patterns of divergence. $\endgroup$ – Matthew Gunn Feb 28 at 16:34
  • $\begingroup$ Hi @MatthewGunn , thanks for your comment. I tried replicating the computation at different dates (e.g Dec 2018 and Jan 2019 so with two different start dates for the normalization) and there is indeed what seems to be a pattern of growing difference which I cannot explain so far. $\endgroup$ – Pierre M Feb 28 at 16:43
  • 1
    $\begingroup$ Doesn't necessarily provide the answer but 2/19/16 is the third Friday of the the month which is when options and futures on indices expire/mature. $\endgroup$ – AlRacoon Feb 28 at 22:21

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.