Survivorship Bias in Emerging Market Small-Cap Indices: Evidence from India's NIFTY Smallcap 250

Paper: arXiv 2603.19380

Authors: Harjot Singh Ranse

Abstract

This study quantifies survivorship bias in India’s NIFTY Smallcap 250 index using a dataset of 1,437 stocks over nine years (2016-2025). By reconstructing historical index composition through market capitalization ranking and comparing equal-weight portfolios of current constituents versus all historical members, I show that survivor-only backtesting overstates annual returns by 4.94 percentage points (23.3%) and Sharpe ratios by 0.097 (9.1%). The analysis reveals an 82.5% turnover rate, including delisted (16.1%), graduated (33.1%), and demoted stocks (33.2%), with all categories contributing to bias. Using bhavcopy data that includes delisted securities, the reconstruction achieves 100% accuracy for current constituents and an estimated 85-90% accuracy historically. These findings highlight that survivorship bias is materially larger in emerging market small-caps and that using only current index members can significantly overstate strategy performance. Briefly, the methodology reconstructs historical index membership using a price-volume-based ranking approach to enable survivor-free backtesting.

Complexity vs Empirical Score

• Math Complexity: 3.0/10
• Empirical Rigor: 6.0/10 (capped from 8.0: transaction costs not modelled; no out-of-sample test; see penalty flags)
• Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper relies on straightforward arithmetic rather than complex mathematics, but it demonstrates strong empirical rigor through a clean reconstruction of historical index constituents using raw bhavcopy data. It addresses a critical practical bias in quantitative backtesting specific to emerging market small-caps with clear, actionable findings.

Research Flowchart

  flowchart TD
    A[Research Goal: Quantify Survivorship Bias in NIFTY Smallcap 250 2016-2025] --> B[Data Input: Bhavcopy Dataset of 1,437 Stocks Incl. Delisted Securities]
    B --> C[Methodology: Reconstruct Historical Index Composition via Market Cap Ranking]
    C --> D[Portfolio Construction: Build Equal-Weight Portfolios for Survivor-Only vs. Survivor-Free Sets]
    D --> E[Analysis: Measure 82.5% Index Turnover Rate & Performance Divergence]
    E --> F[Key Outcome: Survivorship Bias Overstates Annual Returns by 4.94% & Sharpe Ratio by 0.097]