German stock market and its indices
German stock market is comprised of seven stock exchanges, with the Frankfurt stock exchange being the biggest by trading volume as well as by the amount of listed companies. Nowadays, the exchange handles over 90% of trading volume in the country. The exchange’s history dates back to 9th century. However, it was only after the World War II, when Frankfurt exchange (Frankfurter Wertpapierbörse) distinguished itself as the leader in stock trading in Germany.
Nowadays, most of the orders are being processed through the electronic trading system XETRA, that both collects and matches the orders. Floor trading via open outcry takes place as well, but all the orders from both XETRA and the floor enter a single electronic order book. The Settlement of transactions takes place two days after the trade. The Frankfurt stock exchange is currently the second most liquid exchange in the Eurozone area with the daily volume of over 1 million processed trades [3]. Due to extensive use of electronic trading and constant improvements of the system, trading on XETRA is considered highly efficient. Beside stocks, various ETFs, ETCs, REITs, certificates and even options are traded here. The exchange along with the XETRA system are operated by Deutsche Boerse Group. It publishes more than 2100 indices in total, many of them highly specialized in particular segments.
Deutscher Aktienindex (DAX) is a major European blue chip capitalization-weighted stock index of global importance. It comprises 30 biggest German companies by market capitalization and trading volume with the weight of a single company limited to 10 % . The underlying quotes are taken from the XETRA electronic trading system3 and provided by Deutsche Boerse, which is also responsible for the index’s calculation and publishing. The index is calculated every single second during XETRA trading hours, which last from 9:00 to 17:45 on every trading day. DAX was established in 1988 with the basic level of 1000, but it is possible to reconstruct it back to 1959, using the data from the Boersen Zeitung Index. The index is constantly adjusted for changes in capital structure of the companies, i.e. dividends, stock splits, spinoffs and others by the means of correction factors. Thus, the effect is that these events have no bearing on the index level (in fact, it is as if all the dividends were reinvested into the index portfolio).
Moreover, the index is revised every 3 months in a procedure called chaining (Verkettung). This process takes place on the expiration day of DAX futures traded at the Eurex derivatives exchange. During chaining, the companies within the index as well as all the eligible candidates for entry are reassessed based on the criteria of order book volume and market capitalization and ranked by these criteria. According to the rules set by the Deutsche Boerse’s board of directors, the incumbent index companies can be replaced by others, if they no longer qualify for membership in the index. Then, in case there are some changes in the index, a chaining factor is computed and used in all computations until the next chaining day, in order to ensure price continuity (i.e. to avoid sudden jumps in index’s value), as new companies enter the index. Moreover, an extraordinary chaining takes place also in case of bankruptcy of any incumbent company. In November 2008, the Deutsche Boerse introduced a new rule temporarily excluding highly volatile stocks from the DAX. This decision was caused by the awkward situation. There are also other indices with the letters „DAX“included in their names – such as DAX 15, DAX 100, Tech DAX, VDAX, etc. However, these are lesser indices that are much less commonly used. Nevertheless, we shall use the expression DAX throughout the text, always meaning the DAX 30, the German primary index. Prior to 1999, the quotes were taken from the trading floor.
When Volkswagen AG stock, which rose by more than 300% in two days due to a shortsqueeze caused by short-sellers trying to cover their positions, has brought the DAX to a positive overall performance in spite of the fact that all the other companies’ stocks were falling. However, this rule was not in effect at the time we are going to examine and hence we are not going to discuss it any further in this work.
source: DAX’s January 2008 crash: A routine correction or outright panic?
By: Martin Baláž
Comenius University in Bratislava, Faculty of management
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