A mixed 0–1 LP for index tracking problem with CVaR risk constraints

Meihua Wang (), Chengxian Xu (), Fengmin Xu () and Hongang Xue ()

Annals of Operations Research, 2012, vol. 196, issue 1, 609 pages

Abstract: Index tracking problems are concerned in this paper. A CVaR risk constraint is introduced into general index tracking model to control the downside risk of tracking portfolios that consist of a subset of component stocks in given index. Resulting problem is a mixed 0–1 and non-differentiable linear programming problem, and can be converted into a mixed 0–1 linear program so that some existing optimization software such as CPLEX can be used to solve the problem. It is shown that adding the CVaR constraint will have no impact on the optimal tracking portfolio when the index has good (return increasing) performance, but can limit the downside risk of the optimal tracking portfolio when index has bad (return decreasing) performance. Numerical tests on Hang Seng index tracking and FTSE 100 index tracking show that the proposed index tracking model is effective in controlling the downside risk of the optimal tracking portfolio. Copyright Springer Science+Business Media, LLC 2012

Keywords: Index tracking; CVaR constraints; Cardinality constraints; Mixed 0–1 LP (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s10479-011-1042-9

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