Earlier this year, a working party commissioned by the BMF&Bovespa to look into its increasingly antiquated volatility-driven methodology of the Ibovespa made a unanimously approved set of recommendations to Brazil’s stock exchange. According to one member of the working group (which comprised bankers, portfolio managers and brokers), despite commissioning the group the exchange had been signalling reluctance to part with its 46-year-old methodology. Renata Cabral, quantitative analyst at Corretora Santander in São Paulo, says the decision to switch methodologies came as a surprise: "Investors and analyst weren’t expecting this," she says. "The Bovespa was concerned about changing its methodology because it has a good track record, but this is good news."
But recent cases, not least OGX, had clearly shown the problems that weighting on volatility can bring: the oil company’s shares fell 91% in 2013 during a turbulent and volatile period for the stock, which increased the company’s weighting on the index. "Even as the company was close to filing for Chapter 11 [style bankruptcy protection], OGX was the third-largest stock on the Bovespa, so clearly they realized the problem of the liquidity methodology and decided to make a change," says a banker who declined to be named.
