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

TL;DR

This paper quantifies survivorship bias in India's NIFTY Smallcap 250 index, showing that ignoring delisted and demoted stocks inflates historical performance metrics by nearly 24%, with implications for emerging market small-cap strategies.

Contribution

It introduces a methodology to reconstruct historical index composition using market cap rankings, enabling survivor-free backtesting in emerging markets.

Findings

Survivorship bias inflates annual returns by 4.94 percentage points.

Index turnover rate is 82.5%, with significant contributions from delisted and demoted stocks.

Reconstruction accuracy is 85-90% using bhavcopy data.

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.