A Sustainability-Oriented Enhanced Indexation Model with Regime Switching and Cardinality Constraint

Zhiping Chen, Xinkai Zhuang and Jia Liu
Additional contact information
Zhiping Chen: School of Mathematics and Statistics, Xi’an Jiaotong University, Xi’an 710049, China
Xinkai Zhuang: School of Mathematics and Statistics, Xi’an Jiaotong University, Xi’an 710049, China
Jia Liu: School of Mathematics and Statistics, Xi’an Jiaotong University, Xi’an 710049, China

Sustainability, 2019, vol. 11, issue 15, 1-14

Abstract: Enhanced indexation is an active portfolio management strategy aimed to find a portfolio outperforming a market index. To ensure stable returns and to avoid extreme losses, a sensible enhanced indexation model should be sustainable, where the parameters of the model should be adjusted adaptively according to the market environment. Hence, in this paper, we propose a novel sustainable regime-based cardinality constrained enhanced indexation (RCEI) model, where different benchmarks and cardinalities can be imposed under different market regimes. By using historical observations, the RCEI model is transformed into a deterministic optimization problem with an ? 0 norm constraint. We design a partial penalty method coupled with the proximal alternating direction method of multipliers (ADMM) to solve the deterministic optimization problem. Numerical results in UK and US financial markets confirm the superb performance of the sustainability-oriented RCEI model and the efficiency of the algorithm.

Keywords: enhanced indexation; regime switching; cardinality constraint; proximal ADMM (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.mdpi.com/2071-1050/11/15/4055/pdf (application/pdf)
https://www.mdpi.com/2071-1050/11/15/4055/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:11:y:2019:i:15:p:4055-:d:252223

Access Statistics for this article

Sustainability is currently edited by Ms. Alexandra Wu

More articles in Sustainability from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().