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Designing proxies for stock market indices is computationally hard-super-

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  • M-Y. Kao
  • S.R. Tate

Abstract

In this paper, we study the problem of designing proxies (or portfolios) for various stock market indices based on historical data. We use four different methods for computing market indices, all of which are formulae used in actual stock market analysis. For each index, we consider three criteria for designing the proxy: the proxy must either track the market index, outperform the market index, or perform within a margin of error of the index while maintaining a low volatility. In eleven of the twelve cases (all combinations of four indices with three criteria except the problem of sacrificing return for less volatility using the price-relative index) we show that the problem is NP-hard, and hence most likely intractable.

Suggested Citation

  • M-Y. Kao & S.R. Tate, 2001. "Designing proxies for stock market indices is computationally hard-super-," Quantitative Finance, Taylor & Francis Journals, vol. 1(3), pages 361-371, March.
    • Handle: RePEc:taf:quantf:v:1:y:2001:i:3:p:361-371
    DOI: 10.1080/713665725
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    Cited by:

    1. Philip Z. MAYMIN, 2018. "The Conventional Past, Behavioral Present, and Algorithmic Future of Risk and Finance," Finante - provocarile viitorului (Finance - Challenges of the Future), University of Craiova, Faculty of Economics and Business Administration, vol. 1(20), pages 74-84, November.

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