Enhanced index tracking problem: a new optimization model and a sum-of-ratio based algorithm

F. Hooshmand () and Z. Rasouli ()
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F. Hooshmand: Amirkabir University of Technology (Tehran Polytechnic)
Z. Rasouli: Amirkabir University of Technology (Tehran Polytechnic)

OPSEARCH, 2023, vol. 60, issue 3, No 10, 1286-1311

Abstract: Abstract Enhanced index tracking as one of the approaches of stock portfolio selection has received great attention from researchers. In this paper, a new optimization model with the objectives of maximizing the Omega-ratio and minimizing the deviation of the portfolio value from the scaled market-index value is presented. Since the objective function of the model is in the form of maximizing the subtraction of a linear fractional term and a convex quadratic term, it belongs to the category of sum-of-ratio problems which is difficult to solve. Thus, an efficient algorithm is adopted to solve it. Then, the model and algorithm are extended to incorporate the cardinality constraint. Computational experiments over real-world instances indicate that, on average, the portfolio obtained by our model outperforms the model that solely optimizes the Omega-ratio in terms of different metrics such as accumulated return and tracking error on out-of-sample data.

Keywords: Enhanced index tracking; Omega-ratio; Deviation of the portfolio value from the index value; Sum-of-ratio; Modified newton-based algorithm; 90C90; 91G10 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s12597-023-00658-9

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