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Mixed-integer programming approaches for index tracking and enhanced indexation

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  • Canakgoz, N.A.
  • Beasley, J.E.

Abstract

We consider the problem of reproducing the performance of a stock market index, but without purchasing all of the stocks that make up the index, index tracking. We also consider the problem of out-performing the index, enhanced indexation. We present mixed-integer linear programming formulations of these problems. Our formulations include transaction costs, a constraint limiting the number of stocks that can be purchased and a limit on the total transaction cost that can be incurred. As our formulations of these problems are mixed-integer linear programs we can use a standard solver (Cplex). Numeric results are presented for eight data sets drawn from major markets. The largest of these data sets involves over 2000 stocks.

Suggested Citation

  • Canakgoz, N.A. & Beasley, J.E., 2009. "Mixed-integer programming approaches for index tracking and enhanced indexation," European Journal of Operational Research, Elsevier, vol. 196(1), pages 384-399, July.
    • Handle: RePEc:eee:ejores:v:196:y:2009:i:1:p:384-399
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    References listed on IDEAS

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