Mishra, SK (2007): Construction of an Index by Maximization of the Sum of its Absolute Correlation Coefficients with the Constituent Variables.
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Abstract
On many occasions we need to construct an index that represents a number of variables. Cost of living index, general price index, human development index, index of level of development, etc are some of the examples that are constructed by a weighted (linear) aggregation of a host of variables. The weights are determined by the importance assigned to the variables to be aggregated. The criterion on which importance of a variable (visàvis other variables) is determined may be varied and usually has its own logic. In many cases the analyst does not have any preferred means or logic to determine the relative importance of different variables. In such cases, weights are assigned mathematically. One of the methods to determine such mathematical weights is the Principal Components analysis.
In the Principal Components analysis weights are determined such that the sum of the squared correlation coefficients of the index with the constituent variables is maximized. The method has, however, a tendency to pick up the subset of highly correlated variables to make the first component, assign marginal weights to relatively poorly correlated subset of variables and/or to relegate the latter subset to construction of the subsequent principal components. If one has to construct a single index, such an index undermines the poorly correlated set of variables. The index so constructed is elitist in nature that has a preference to the highly correlated subset over the poorly correlated subset of variables. Further, since there is no dependable method available to obtain a composite index by merging two or more principal components, the deferred set of variables never finds its representation in the further analysis.
In this paper we suggest a method to construct an index by maximizing the sum of the absolute correlation coefficients of the index with the constituent variables. We also suggest construction of an alternative index by maximin correlation. Our experiments suggest that the indices so constructed are inclusive or egalitarian. They do not prefer the highly correlated variables much to the poorly correlated variables.
Item Type:  MPRA Paper 

Institution:  NorthEastern Hill University, Shillong (India) 
Original Title:  Construction of an Index by Maximization of the Sum of its Absolute Correlation Coefficients with the Constituent Variables 
Language:  English 
Keywords:  Index; weighted linear aggregation; principal components; elitist; inclusive; egalitarian; sum of absolute correlation coefficients; maximin correlation; Human development index; cost of living index; level of development index; Differential Evolution; Particle Swarm optimization 
Subjects:  C  Mathematical and Quantitative Methods > C4  Econometric and Statistical Methods: Special Topics > C43  Index Numbers and Aggregation C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C10  General 
Item ID:  3333 
Depositing User:  Sudhanshu Kumar Mishra 
Date Deposited:  27. May 2007 
Last Modified:  18. Feb 2013 10:53 
References:  · Kendall, MG and Stuart, A (1968): The Advanced Theory of Statistics, Charles Griffin & Co. London, vol. 3. · Kuester, J.L. and Mize, J.H. (1973): Optimization Techniques with Fortran, McGrawHill Book Co. New York. · McCracken, K (2000): “Some Comments on the Seifa96 Indexes”, Paper presented in the 10th Biennial Conference of the Australian Population Association, Melbourne, Australia. www.apa.org.au/upload/20007B_McCracken.pdf · Mishra, SK (2006): “Global Optimization by Differential Evolution and Particle Swarm Methods: Evaluation on Some Benchmark Functions”. SSRN http://ssrn.com/abstract=933827 · Munda, G. and Nardo, M (2005) : “Constructing Consistent Composite Indicators: The Issue of Weights”, EUR 21834 EN, Institute for the Protection and Security of the citizen, European Commission, Luxembourg. · OECD (2003) Composite Indicators of Country Performance: A Critical Assessment, DST/IND(2003)5, Paris. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/3333 
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 Construction of an Index by Maximization of the Sum of its Absolute Correlation Coefficients with the Constituent Variables. (deposited 27. May 2007) [Currently Displayed]