Following the announcement of the Nikkei 225's weight cap rule, an analysis has been compiled of the impact of Advantest's weighting on the index, along with estimates for long-short and short-term swing strategies based on that impact.
The Nikkei 225 is calculated as a simple average of stock prices, with the top 4 constituents accounting for approximately 35.9% of the index. Advantest alone has a 12.3% weighting, and its large price movements mean that it may have a significant impact on the Nikkei 225 as a whole.
To limit excessive impacts on the Nikkei 225, a weight cap rule reduces the stock price conversion factor for constituents whose weighting exceeds 10%, thereby moderating their influence. The mechanism is announced and applied twice a year. Announcements are made after trading hours, and application normally begins on the following trading day.
The long-short strategy examined a combination of short-selling the relevant constituent on margin and buying an ETF that seeks to track the Nikkei 225. The backtest showed 2 wins and 1 loss across 3 cases, with an average return of +0.9%, but the strategy's advantage was considered uncertain in market conditions heavily affected by external factors.
The short-term swing strategy was estimated by buying the constituent at the closing price on the day before the coefficient change and selling it at the closing price on the implementation date. The strategy was positive in all 3 cases, producing an average return of +4.8% over an investment period of approximately 1 day. However, concerns about reproducibility remain because the sample comprised only 3 cases and returns varied significantly from day to day.