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A new stochastic dominance approach to enhanced index tracking problems

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  • Renato Bruni

    ()
    (Università di Roma “Sapienza” Dip. di Ingegneria Informatica, Automatica e Gestionale)

  • 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)

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.

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File URL: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I4-P333.pdf
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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 32 (2012)
Issue (Month): 4 ()
Pages: 3460-3470

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Handle: RePEc:ebl:ecbull:eb-12-00706

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Related research

Keywords: Enhanced Index Tracking; Portfolio Selection; Stochastic Dominance; Constraint Generation;

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References

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  1. repec:ebl:ecbull:v:7:y:2005:i:7:p:1-7 is not listed on IDEAS
  2. Jean Marc Bottazzi & Jaime Luque & Mario Pascoa, 2011. "Securities market theory: possession, repo and rehypothecation," 2011 Meeting Papers 1214, Society for Economic Dynamics.
  3. Haim Levy, 1992. "Stochastic Dominance and Expected Utility: Survey and Analysis," Management Science, INFORMS, INFORMS, vol. 38(4), pages 555-593, April.
  4. Carol Alexander & Anca Dimitriu, 2005. "Indexing, cointegration and equity market regimes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(3), pages 213-231.
  5. Andrea Scozzari & Fabio Tardella & Sandra Paterlini & Thiemo Krink, 2012. "Exact and Heuristic Approaches for the Index Tracking Problem with UCITS Constraints," Department of Economics, University of Modena and Reggio E., Faculty of Economics "Marco Biagi" 0685, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
  6. Beasley, J. E. & Meade, N. & Chang, T. -J., 2003. "An evolutionary heuristic for the index tracking problem," European Journal of Operational Research, Elsevier, Elsevier, vol. 148(3), pages 621-643, August.
  7. Canakgoz, N.A. & Beasley, J.E., 2009. "Mixed-integer programming approaches for index tracking and enhanced indexation," European Journal of Operational Research, Elsevier, Elsevier, vol. 196(1), pages 384-399, July.
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Cited by:
  1. Renato Bruni & Francesco Cesarone & Andrea Scozzari & Fabio Tardella, 2013. "No arbitrage and a linear portfolio selection model," Economics Bulletin, AccessEcon, vol. 33(2), pages 1247-1258.

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