No arbitrage and a linear portfolio selection model
AbstractWe propose a linear bi-objective optimization approach to the problem of finding a portfolio that maximizes average excess return with respect to a benchmark index while minimizing underperformance over a learning period. We establish some theoretical results linking classical No Arbitrage conditions to the existence of a feasible portfolio for our model that strictly outperforms the index. Empirical analyses on publicly available real-world financial datasets show the effectiveness of the model and confirm the described theoretical results.
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Bibliographic InfoArticle provided by AccessEcon in its journal Economics Bulletin.
Volume (Year): 33 (2013)
Issue (Month): 2 ()
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Enhanced Index Tracking; Asset Management; Portfolio Selection; No Arbitrage; Linear Programming;
Find related papers by JEL classification:
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
- G1 - Financial Economics - - General Financial Markets
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- Renato Bruni & Francesco Cesarone & Andrea Scozzari & Fabio Tardella, 2012. "A new stochastic dominance approach to enhanced index tracking problems," Economics Bulletin, AccessEcon, vol. 32(4), pages 3460-3470.
- 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.
- Andrea Scozzari & Fabio Tardella & Sandra Paterlini & Thiemo Krink, 2012.
"Exact and Heuristic Approaches for the Index Tracking Problem with UCITS Constraints,"
Department of Economics
0685, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
- Andrea Scozzari & Fabio Tardella & Sandra Paterlini & Thiemo Krink, 2012. "Exact and heuristic approaches for the index tracking problem with UCITS constraints," Center for Economic Research (RECent) 081, University of Modena and Reggio E., Dept. of Economics.
- Beasley, J. E. & Meade, N. & Chang, T. -J., 2003. "An evolutionary heuristic for the index tracking problem," European Journal of Operational Research, Elsevier, vol. 148(3), pages 621-643, August.
- Dose, Christian & Cincotti, Silvano, 2005. "Clustering of financial time series with application to index and enhanced index tracking portfolio," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 355(1), pages 145-151.
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