 Enhanced index tracking: A relative downside risk approachRonghua Luo, Zeyu Huang and Yangyi Liu The North American Journal of Economics and Finance, 2025, vol. 80, issue C Abstract: We introduce the Relative Downside Tracking Error (RDTE) model, a dynamic enhanced indexing method that adapts to the time-varying and mean-reverting nature of market volatility. The RDTE model dynamically adjusts the weights assigned to downside deviations based on market volatility, allowing for greater flexibility during high-volatility periods. This flexibility helps the model reduce the emphasis on short-term fluctuations, focusing instead on minimizing overall downside risk. By doing so, the model effectively controls portfolio distortion, leading to more stable long-term performance. Empirical analyses of U.S. and Chinese stock markets demonstrate that the RDTE model consistently outperforms traditional models, delivering higher returns, lower downside risk, and better risk-adjusted performance. This outperformance is driven by the RDTE model’s effective downside risk management during volatile periods, as confirmed by its superior long-term performance in both markets. Keywords: Enhanced index tracking; Downside risk; Time-varying volatility (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:80:y:2025:i:c:s106294082500141x DOI: 10.1016/j.najef.2025.102501 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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