A new stochastic dominance approach to enhanced index tracking problems

Renato Bruni (), Francesco Cesarone (), Andrea Scozzari () and Fabio Tardella ()
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Francesco Cesarone: Università degli Studi Roma Tre Dipartimento di Economia
Andrea Scozzari: Università degli Studi “Niccolò Cusano” - Telematica, Roma Facoltà di Economia
Fabio Tardella: Università di Roma “Sapienza” Dip. Metodi e Modelli per l''Economia, il Territorio e la Finanza

Economics Bulletin, 2012, vol. 32, issue 4, 3460-3470

Abstract: Enhanced Index Tracking is the problem of selecting a portfolio that should generate excess return with respect to a benchmark index. Here we propose a large-size linear optimization model for Enhanced Index Tracking that selects an optimal portfolio according to a new stochastic dominance criterion and we devise an efficient constraint generation technique to solve such a model. We then compare, on several well-known and publicly available financial data sets, the performances of the portfolios selected by our model to those of the portfolios obtained with other stochastic dominance approaches. The results seem to confirm the practical usefulness of stochastic dominance for portfolio selection.

Keywords: Enhanced Index Tracking; Portfolio Selection; Stochastic Dominance; Constraint Generation (search for similar items in EconPapers)
JEL-codes: C6 G1 (search for similar items in EconPapers)
Date: 2012-12-24
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Citations: View citations in EconPapers (13)

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