Exact and Heuristic Approaches for the Index Tracking Problem with UCITS Constraints
Andrea Scozzari (andrea.scozzari@unisu.it),
Fabio Tardella (fabio.tardella@uniroma.it),
Sandra Paterlini and
Thiemo Krink (thiemo.krink@allianzlife.com)
Department of Economics from University of Modena and Reggio E., Faculty of Economics "Marco Biagi"
Abstract:
Index tracking aims at determining an optimal portfolio that replicates the performance of an index or benchmark by investing in a smaller number of constituents or assets. The tracking portfolio should be cheap to maintain and update, i.e., invest in a smaller number of constituents than the index, have low turnover and low transaction costs, and should avoid large positions in few assets, as required by the European Union Directive UCITS (Undertaking for Collective Investments in Transferable Securities) rules. The UCITS rules make the problem hard to be satisfactorily modeled and solved to optimality: no exact methods but only heuristics have been proposed so far. The aim of this paper is twofold. First, we present the first Mixed Integer Quadratic Programming (MIQP) formulation for the constrained index tracking problem with the UCITS rules compliance. This allows us to obtain exact solutions for small- and medium-size problems based on real-world datasets. Second, we compare these solutions with the ones provided by the state-of-art heuristic Di_erential Evolution and Combinatorial Search for Index Tracking (DECS-IT), obtaining information about the heuristic performance and its reliability for the solution of large-size problems that cannot be solved with the exact approach. Empirical results show that DECS-IT is indeed appropriate to tackle the index tracking problem in such cases. Furthermore, we propose a method that combines the good characteristics of the exact and of the heuristic approaches.
Keywords: Index tracking; mixed integer quadratic programming; stochastic search heuristics; differential evolution; cardinality constraints (search for similar items in EconPapers)
JEL-codes: C15 C61 G11 (search for similar items in EconPapers)
Pages: pages 22
Date: 2012-06
References: Add references at CitEc
Citations: View citations in EconPapers (5)
Downloads: (external link)
http://www.dep.unimore.it/materiali_discussione/0685.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.dep.unimore.it:80 (No such host is known. )
Related works:
Journal Article: Exact and heuristic approaches for the index tracking problem with UCITS constraints (2013) ![Downloads](/downloads_econpapers.gif)
Working Paper: Exact and heuristic approaches for the index tracking problem with UCITS constraints (2012) ![Downloads](/downloads_econpapers.gif)
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:mod:depeco:0685
Access Statistics for this paper
More papers in Department of Economics from University of Modena and Reggio E., Faculty of Economics "Marco Biagi" Contact information at EDIRC.
Bibliographic data for series maintained by Sara Colombini (sara.colombini@unimore.it).