The Performance of Currency Value-Adjusted Stock Indices

Abstract

Indices aggregate the price and return performance of stocks to provide summary measures. The local currency represents the underlying index basis. Variations in the underlying currency value distort indices and can lead to interpretation errors. A 1% decline in an index accompanied by a 2% increase in the underlying currency value implies the investor has a wealth gain. An investor observing the index level in isolation would interpret the data as indicating a wealth decline. This article develops new stock indices that control for the effects of dollar value fluctuations. Globalization and recent instability in currency values highlight the importance of this work.