WO2000025189A2

WO2000025189A2 - A method of determining an index value to assist in deciding whether to buy or sell an asset

Info

Publication number: WO2000025189A2
Application number: PCT/AU1999/000933
Authority: WO
Inventors: Dennis Graham Hulse
Original assignee: Sharegraphics Pty.Ltd.
Priority date: 1998-10-28
Filing date: 1999-10-27
Publication date: 2000-05-04
Also published as: AUPP675298A0

Description

A METHOD OF DETERMINING AN INDEX VALUE TO ASSIST IN DECIDING WHETHER TO BUY OR SELL AN ASSET

FIELD OF THE INVENTION

This invention relates to a method of determining an index value to assist in deciding whether to buy or sell an asset.

The method of determining the index value may be concerned with any desired asset such as shares, currency, futures or any other commodity. The invention will be described by way of example with reference to an index for assisting in deciding to sell or buy shares. It should be appreciated that this is by way of example only and that the method of the invention may also be used for other purposes.

The decision to either buy or sell shares is often a difficult one to make. Often a decision is made on the basis of share price at a particular instance in time or in some arbitrary way. Shares may be sold or purchased without taking relevant factors into account.

It is an object of the present invention to provide a method of determining an index value to assist in deciding whether to buy or sell an asset which at least minimises the difficulty referred to above.

DISCLOSURE OF THE INVENTION

According to one aspect, the invention provides an index value to assist in deciding whether to buy or sell an asset, the method includes determining a variable index being the square root of the percentage difference squared between two interval points of the value of an index, determining a second variable based on a combination scaling constant and a risk rating, the risk rating being a positive value between a first low value and a second high value, a scaling constant being arbitrarily set to provide an index value having a desired magnitude, determining a negative or positive difference in asset price at predetermined intervals times a weighting factor squared and multiplying this by the variable index and by the second variable to thereby obtain the index value. DESCRIPTION OF PREFERRED EMBODIMENT

The asset may be any desired asset such as shares or other commodity, futures, currency or the like. It is preferred that the asset be shares. The variable index value may be determined by reference to the value of a basket or group of assets of a particular type. For example, where the asset consists of shares the variable index value may consist of the all ordinarys index or any equivalent index relating to the assets or shares under consideration such as the Nikkei index, Hang Seng index, NZSE index or any other similar index such as the FT-100 index or the like. Thus, the variable index value may consist of the all ordinarys index value being the square root of the percentage difference squared, between two interval points in time commencing at time zero.

The second variable may be made up of two components, the first of these components maybe considered a risk rating - a positive value determined by the user of the invention on a continuum between a low value which denotes that the user has a low risk aversion and a second high value which denotes that the user has a high risk aversion. Typically the low value may be 0.1 and the high value may be 1.0. It should be appreciated that the continuum may start at any desired low value and finish at any desired high value. This continuum may for example be between 1 to 10 or any other range.

It is desired that the index value determined by the method of the invention be displayed so that the index value may be viewed for decision making to ensure that the scale of the display is enhanced in its presentation to the user. The scaling constant is a positive value and may be a predetermined numerical value such as 10 for example. So that the index value determined by the method may be displayed in an approximate range between plus or minus twenty other desired variable or constants may be included in the method of determining the index value and the impact of these variables or constants on the resultant index value may be compensated by selection of a desired magnitude for the scaling constant.

The method includes determining the positive or negative percentage difference of a share price at predetermined intervals in time times a weighting factor and this provides a core component relating to the negative or positive difference in share price between two intervals in time weighted to account for obsolescence of time over the past or preceding number of days, for example over five days. When time equals zero the weighting of time has a numerical value of five squared. For each day past, the arbitrary weighting squared reduces until the fifth day past where the arbitrary weighting squared is equal to the numeral one squared. The core components over say a five day period is the core component employed in the method of the invention. This arbitrary five day period need not necessarily be over a five day period but can be over any desired five day period such as over ten days or any other desired period in time.

The index value may be determined in the following manner and the equation best illustrates the method. IV = (YK) {Xt-uιXt-ι - 1) (5 - i)² non core part A core component part b ( 1 )

where IV is the index value determined by the method of the invention

K is a constant made up of a risk rating R and a scaling constant or factor SF i is the time or date X_t is today's share price Y is calculated as being

X_t.i = today's price, X^ - 1 = yesterday's price where AO is the all ordinarys index and AO, is the all ordinarys index at time zero.

The mathematical product of part A is determined by establishing the product of the variable index Y times the constant K (which in turn is the product of the risk rating R and a scaling constant SF). The variable index Y is determined from financial data for all the ordinarys index subject to equation

(2).

The risk value is determined as is the scaling factor. Core component B is determined and the table illustrates the expanded formula.

The core component part B when multiplied by non core component part A produces an index value of a particular share price for any given day. When the index value is expressed in numerical and graphical terms it will visually vary from day to day both above and below zero. The extreme range could be as much as plus or minus fifty or higher depending upon share price movement from one day to the next.

There are at least five interpretive functions of the index value determined by the method of the invention. Firstly, the conceptual aspect of the index value is realised as an aid to user's comprehension and understanding. The multitude of share prices and their respective percentage movements are statistically "standardized" for comparative analysis from one interval or period to the next in as near to real time as possible. Intervals may be determined by the needs of the user and could be in intervals of minutes, hours, days, weeks or otherwise.

Secondly the index value allows for outputs to be statistically ranked and expressed with the strongest "buy" outputs at one end of a distribution curve and the strongest "sell" outputs at the other end of the curve. The remainder of the distribution curve of index values reflects varying degrees of index values that may also be aggregated into bands to further aid the decision to buy or sell particular shares. The appearance of the distribution curve varies from day to day.

Thirdly, the distribution curve provides for efficient and effective decision management otherwise not possible in the management of increasingly large volumes of shares and index value information. The nature and extent of an index value change or movement along the distribution curve is combined with statistical "triggers" that result in the display of prompts to aid decision management. For example, the movement variance of an index value equidistant across the mean point of the curve could be greater than the distance from the mean to one of the ends of the distribution curve as between any two interval periods. Alternatively, the extent of change could be marginal about zero over an extended period of time. Thus, the nature and extent of change or variance in the index value (like the index value itself) is a critical consideration in the process of interpreting the information.

Fourthly, high or low index values can also signal rapidly changing fiscal "rate or return" factors over varying time periods apart from being combined with other ways of analysing the movement in the index value. For example, an index value consistently appearing at one or the other end of the distribution curve (and therefor providing a regular buy or sell signal) reflects sustained directional movement in the particular share price. The underlying rate of return will be affected depending upon where the model user tags their rate of return period commencement point. This point may be where a share purchase has been made or alternatively it could simply be the beginning of the monitoring period at the first price data point.

Fifthly, high or low index values may signal changing fiscal "rate of return" environments over varying time periods apart from being integrated with other statistical methodologies.

For example, an index outcome consistently appearing in one or other end of a ranked continuum (and therefor a perceived regular buy or sell signal) will reflect sustained directional movement in the share price. The underlying rate of return will be affected depending on both the time period elapsed and the direction of share price movement in negative or positive terms.

The method includes displaying the index value of a share over a predetermined interval. Other information may also be displayed. For example, a distribution curve of index values for a group of shares may be displayed or the movement in share price of the actual share price may be displayed typically as a graph showing share price over a predetermined period of time.

It should be appreciated that the index value is either a positive or negative number. The greater the magnitude of the negative number the stronger the signal to sell the particular share. The greater the magnitude of the positive number the greater the signal to buy the share.

Claims

1. Providing an index value to assist in deciding whether to buy or sell an asset, the method including determining a variable index being the square root of the percentage difference squared between two interval points of the value of an index, determining a second variable based on a combination scaling constant and a risk rating, the risk rating being a positive value between a first low value and a second high value, a scaling constant being arbitrarily set to provide an index value having a desired magnitude, determining a negative or positive difference in asset price at predetermined intervals times a weighting factor squared and multiplying this by the variable index and by the second variable to thereby obtain the index value.

2. Providing the index value of claim 1 wherein the risk rating is a value between 0.1 and 1.0.

3. Providing the index value of claim 1 wherein the negative or positive percentage difference in asset price is determined daily for a period of five days.

4. Providing the index value of claim 3 wherein the variable index is determined by reference to a basket or group of assets of a particular type.

5. Providing the index value of claim 4 wherein the asset consists of shares and the variable index value consists of an index selected from a group consisting of the all ordinaries index, the Nikkei index, the Hang Seng index, the NZSE index and the FT100 index.

6. Providing the index of claim 5 wherein the two interval points are one day apart in time.