Rebalancing Algorithm
Install and import#
npm install fintech-algorithmsimport { calculate } from "fintech-algorithms/index-and-benchmark-engineering/governance-and-maintenance/rebalancing-algorithm";Signature#
calculate(data)Turns a weight change into the trades that implement it, and reports the turnover. Turnover is the number that predicts what tracking the index will cost.
Parameters#
| Name | Type | Notes |
|---|---|---|
data | { records: Record[]; notional: number } | records carry current and target weights per constituent; notional is the portfolio size the trades are sized against. |
Returns#
{ trades, oneWayTurnover, grossTradeValue }
The trade list plus one-way turnover — stated as one-way explicitly, because quoting two-way turnover doubles the apparent cost.
Errors#
- When notional is not positive — throws
Complexity: time O(n),
space O(n).
Worked example#
verified This is the worked example published in the article, replayed by the test suite on every run. The output cannot drift.
Input#
{
"records": [
{
"id": "A",
"price": 50,
"oldWeight": 0.35,
"targetWeight": 0.3
},
{
"id": "B",
"price": 25,
"oldWeight": 0.25,
"targetWeight": 0.3
},
{
"id": "C",
"price": 80,
"oldWeight": 0.22,
"targetWeight": 0.2
}
],
"notional": 100000000
}Call#
calculate(data)Returns#
object with 3 fields: trades, oneWayTurnover, grossTradeValue
{
"trades": [
{
"id": "A",
"tradeValue": -5000000,
"targetIndexShares": 600000
},
{
"id": "B",
"tradeValue": 5000000,
"targetIndexShares": 1200000
},
{
"id": "C",
"tradeValue": -2000000,
"targetIndexShares": 250000
}
],
"oneWayTurnover": 0.07,
"grossTradeValue": 14000000
}Diagrams#
Calculation flow#
Rebalancing Algorithm calculation flow
flowchart LR
A["Point-in-time inputs"] --> B["Validate units and timing"]
B --> C{"Contract feasible?"}
C -->|No| D["Reject with reason"]
C -->|Yes| E["Calculate Rebalancing Algorithm"]
E --> F["Recompute invariants"]
F --> G{"Checks pass?"}
G -->|No| D
G -->|Yes| H["Publish audited output"]
Rebalancing Algorithm methodology state
stateDiagram-v2
[*] --> FrozenInputs
FrozenInputs --> Validated: contract passes
FrozenInputs --> Rejected: missing or infeasible
Validated --> Calculated: apply named rule
Calculated --> Audited: invariants pass
Calculated --> Rejected: invariant fails
Audited --> Published: version and timestamp recorded
Published --> Revised: approved correction
Revised --> FrozenInputs: rebuild from retained source state
How it works#
This page states the contract — how to call it correctly. The article explains the concept: why it works, and where it breaks.
References#
- S&P Dow Jones Indices Index Mathematics Methodology — S&P Dow Jones Indices
- S&P DJI Equity Indices Policies & Practices — S&P Dow Jones Indices
- FTSE Russell Capping Methodology — FTSE Russell, LSEG
- FTSE Russell Index Policy and Methodology Library — FTSE Russell, LSEG
- MSCI Global Investable Market Indexes Methodology Library — MSCI
- MSCI Minimum Volatility Indexes Methodology — MSCI
- S&P Risk Control 2.0 Indices Methodology — S&P Dow Jones Indices
- Principles for Financial Benchmarks — International Organization of Securities Commissions
- Regulation (EU) 2016/1011 — European Union
- Portfolio Selection — Harry Markowitz
- On the Properties of Equally-Weighted Risk Contributions Portfolios — Sébastien Maillard, Thierry Roncalli, and Jérôme Teïletche
- Fundamental Indexation — Robert Arnott, Jason Hsu, and Philip Moore
- FTSE Currency Hedging Methodology Overview — FTSE Russell, LSEG