A Functional approach for constructing dynamic Composite Indicators

Abstract

This paper contributes to the research on the development of comparable composite indicators by introducing a Functional Weighted Malmquist Productive Index that allows for comparative trend analysis. In analogy with entropy-based weighted methods, this novel dynamic indicator is derived by measuring the degree of diversification of the single method through a family of diversity indices. The paper has the merit of proposing a new dynamic composite indicator that supplements the analysis with Functional Data Analysis (FDA) tools that provide us with useful information about the order and dynamics of the composite index trajectories. The simulation study set up in this paper raises doubts about the robustness of the entropy-based weighted methods while the application of the new index to well-being dataset highlights its practical appeal.