Example
Assume that in the first election the Blue Party won 65%, the Orange Party won 25%, and the Fuchsia Party won 10%. Furthermore, assume that in the second election the Blue Party won 65%, the Orange Party won 15%, and the Fuchsia Party won 20%.
| Election\Party | Blue | Orange | Fuchsia |
|---|---|---|---|
| 1st | 65% | 25% | 10% |
| 2nd | 65% | 15% | 20% |
| Gain/Loss | 0 | -10 | 10 |
The index would be equal to Blue gains (none) plus Orange's loss (10% since we do not consider sign differences) plus Fuchsia gains (10%). We then multiply it by 1/2 or divide by 2 for a total volatility of 10%.
If all three parties had disappeared in the next election, and been replaced by the Red Party (75%) and the Black Party (25%), the volatility would have been 100%: The first three lose all (100%) + the Red Party gaining 75% and the Black Party 25% since the previous election (when they both received no votes.) 100+100 = 200 -> divide by 2 = 100
Read more about this topic: Pedersen Index, Construction of The Index
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