GFCI Methodology

GFCI Methodology

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The GFCI provides ratings for financial centres calculated by a ‘factor assessment model’ built using two distinct sets of input:

instrumental factors - drawn from external sources. The infrastructure competitiveness for a financial centre, for example, is indicated by ‘instrumental factors’ including a cost of property survey and an occupancy costs index; a fair and just business environment is indicated by ratings such as a corruption perception index and an opacity index. Objective evidence of competitive factors has been sought in instrumental factors drawn from a wide variety of comparative sources - 62 instrumental factors were used to construct the GFCI 3 ratings. Not all centres have data for all instrumental factors and the statistical model takes account of these gaps;
financial centre assessments – to construct the GFCI 3 ratings 18,878 financial centre assessments drawn from 1,236 respondents to an online questionnaire. Respondents assessed the competitiveness of financial centres which they knew. The online questionnaire is ongoing to keep the GFCI up-to-date with people’s changing assessments.

The 62 instrumental factors were selected to reflect the 14 competitiveness factors identified in previous research^[1]. These are shown in Table A:

Table A: Competitiveness Factors and their relative importance

Competitiveness Factors	Rank	Average Score
The availability of skilled personnel	1	5.37
The regulatory environment	2	5.16
Access to international financial markets	3	5.08
The availability of business infrastructure	4	5.01
Access to customers	5	4.90
A fair and just business environment	6	4.67
Government responsiveness	7	4.61
The corporate tax regime	8	4.47
Operational costs	9	4.38
Access to suppliers of professional services	10	4.33
Quality of life	11	4.30
Culture & language	12	4.28
Quality / availability of commercial property	13	4.04
The personal tax regime	14	3.89

At the outset of the GFCI, a number of guidelines were set out. These guidelines are to ensure that centre assessments and instrumental factors were selected and used in a way that will generate a credible, dynamic rating of centre competitiveness for financial services institutions.

The guidelines for independent indices used as instrumental factors are:

indices should come from a reputable body and be derived by a sound methodology;
indices should be readily available (ideally in the public domain) and ideally be regularly updated;
relevant indices can be added to the GFCI model at any time;
updates to the indices are collected and collated quarterly at the end of each quarter;
no weightings are applied to indices;
indices are entered into the GFCI model as directly as possible, whether this is a rank, a derived score, a value, a distribution around a mean or a distribution around a benchmark;
if a factor is at a national level, the score will be used for all centres in that country – nation based factors will be avoided if financial centre (city) based factors are available;
if an index has multiple values for a city or nation, the most relevant value is used (and the method for judging relevance is noted);
if an index is at a regional level, the most relevant allocation of scores to each centre is made (and the method for judging relevance is noted);
if an index does not contain a value for a particular city, a blank is entered against that centre (no average or mean is used). Only indices which have values for at least ten centres will be included.

Creating the GFCI does not involve totaling or averaging instrumental factors. An approach involving totaling and averaging would involve a number of difficulties:

indices are published in a variety of different forms: an average or base point of 100 with scores above and below this; a simple ranking; actual values (e.g. $ per square foot of occupancy costs); a composite ‘score’;
indices would have to be normalised, e.g. in some indices a high score is positive while in others a low score is positive;
not all centres are included in all indices;
the indices would have to be weighted.

The guidelines for financial centre assessments by respondents are:

responses are collected via an online questionnaire which runs continuously. A link to this questionnaire is emailed to the target list of respondents at regular intervals;
financial centre assessments will be included in the GFCI model for 36 months after they have been received. Financial centre assessments from the month when the GFCI is created are given full weighting and earlier responses are given a reduced weighting on a log scale. This scale has been revised between GFCI 1 and GFCI 2 to enhance its effectiveness, and used again for GFCI 3, shown in Chart A:

Chart A: Log Scale for time weightings

The financial centre assessments and instrumental factors are used to build a predictive model of centre competitiveness using a support vector machine (SVM). The SVM used for the building of the GFCI is PropheZy – Z/Yen’s proprietary system. SVMs are based upon statistical techniques that classify and model complex historic data in order to make predictions on new data. SVMs work well on discrete, categorical data but also handle continuous numerical or time series data. The SVM used for the GFCI provides information about the confidence with which each specific classification is made and the likelihood of other possible classifications.

A factor assessment model is built using the centre assessments from responses to the online questionnaire. Assessments from respondents’ home centres are excluded from the factor assessment model to remove home bias. This change between GFCI 1 and GFCI 2 is an improvement to the methodology by further reducing the risk of home bias. The model then predicts how respondents would have assessed centres they are not familiar with by answering questions such as:

If an investment banker gives Singapore and Sydney certain assessments then, based on the instrumental factors for Singapore, Sydney and Paris, how would that person assess Paris?

Or

If a pension fund manager gives Edinburgh and Munich a certain assessment then, based on the instrumental factors for Edinburgh, Munich and Zurich, how would that person assess Zurich?

Financial centre predictions from the SVM are re-combined with actual financial centre assessments to produce the GFCI – a set of financial centre ratings. The GFCI is dynamically updated by either an updated instrumental factor or new financial centre assessments. These updates permit, for instance, a recently changed index of rental costs to dynamically adjust the competitiveness rating of the centres. The process of creating the GFCI is outlined diagrammatically in Chart B:

Chart B: The GFCI Process

A few features of building the GFCI using both instrumental factors:

several instrumental factors can be used for each competitive factor and there are likely to be alternatives available once the GFCI is established;
a strong international group of ‘raters’ can be developed as the GFCI progresses;
sub-GFCI ratings are being developed by using the business sectors represented by questionnaire respondents. This could make it possible to rate London as competitive in Insurance (for instance) while less competitive in Asset Management (for instance);
over time, as confidence in the GFCI builds, the factor assessment model can be queried in a ‘what if’ mode - “how much would London rental costs need to fall in order to increase London’s ranking against New York?”

Part of the process of building the GFCI was extensive sensitivity testing to changes in instrumental factors and financial centre assessments. The accuracy of predictions given by the SVM were tested against actual assessments. Over 80% of the predictions made were accurate to within 5%.

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Copyright © 1994-2009 - The Z/Yen Group of Companies
Last modified: 11 February 2009

Copyright © 1994-2009 - The Z/Yen Group of Companies Last modified: 11 February 2009

Copyright © 1994-2009 - The Z/Yen Group of Companies
Last modified: 11 February 2009