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Index Tracking with Control on the Number of Assets

Author

Listed:
  • Leonardo Riegel Sant'Anna

    (Universidade Federal do Rio Grande do Sul)

  • Tiago Pascoal Filomena
  • Denis Borenstein

Abstract

Index tracking is a passive investment strategy, which aims at generating portfolios to reproduce a specific market index’s performance. This article proposes a model for a index tracking problem with control on the number of assets in the portfolio, which corresponds to a restriction in transaction costs. The model is applied to Ibovespa (sample: 67 stocks) from January/2009 to July/2012. Portfolios were formed without limiting the amount of stocks and limiting this amount to 40, 30 and 20 stocks, with rebalancing periods of 20, 40 and 60 trading days. The results were satisfactory especially for the 60 days rebalancing period, in which transaction costs become lower due to the longer rebalancing period. We also verified that changes in Cplex parameters didn’t influence the results especially in relation to the computational times. Therefore, we also conclude about the need of using heuristic approaches to form portfolios with smaller amounts of assets.

Suggested Citation

  • Leonardo Riegel Sant'Anna & Tiago Pascoal Filomena & Denis Borenstein, 2014. "Index Tracking with Control on the Number of Assets," Brazilian Review of Finance, Brazilian Society of Finance, vol. 12(1), pages 89-119.
    • Handle: RePEc:brf:journl:v:12:y:2014:i:1:p:89-119
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    Citations

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    Cited by:

    1. Leonardo Riegel Sant’Anna & Tiago Pascoal Filomena & Pablo Cristini Guedes & Denis Borenstein, 2017. "Index tracking with controlled number of assets using a hybrid heuristic combining genetic algorithm and non-linear programming," Annals of Operations Research, Springer, vol. 258(2), pages 849-867, November.

    More about this item

    Keywords

    index tracking; portfolio optimization; quadratic integer programming;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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