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Indexation of Fixed-Income Portfolios to the IMA-B

Listed author(s):
  • Emilio Ricardo Carvalhais

    (Banco do Brasil)

  • Antonio Marcos Duarte Júnior

    (Ibmec Business School)

Registered author(s):

    This study considers the problem of indexing fixed-income portfolios to the ANBIMA Market Index – Series B (IMA-B), composed of Brazilian National Treasury Notes – Series B (NTNBs). We propose a mathematical model that minimizes the deviations of the returns of the chosen portfolio in relation to the returns of the index’s theoretical portfolio. The resulting model is a mathematical programming problem with convex objective function, linear constraints and free and non-negative integer variables. Five numerical examples with real data are presented to illustrate the model’s practical use. The results obtained from the fits are analyzed together with data for funds indexed to the IMA-B existing in the Brazilian financial market. The proposed method resulted in fits with optimal control of the tracking errors of the indexed portfolio.

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    File URL: http://www.bbronline.com.br/public/edicoes/12_3/artigos/jfyxfujbss4112015143412.pdf
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    Article provided by Fucape Business School in its journal Brazilian Business Review.

    Volume (Year): 12 (2015)
    Issue (Month): 3 (May)
    Pages: 116-142

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    Handle: RePEc:bbz:fcpbbr:v:12:y:2015:i:3:p:116-142
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    1. Petajisto, Antti, 2011. "The index premium and its hidden cost for index funds," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 271-288, March.
    2. Alexander, C. & Barbosa, A., 2008. "Hedging index exchange traded funds," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 326-337, February.
    3. Thiemo Krink & Stefan Mittnik & Sandra Paterlini, 2009. "Differential evolution and combinatorial search for constrained index-tracking," Annals of Operations Research, Springer, vol. 172(1), pages 153-176, November.
    4. Harper, Joel T. & Madura, Jeff & Schnusenberg, Oliver, 2006. "Performance comparison between exchange-traded funds and closed-end country funds," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(2), pages 104-122, April.
    5. Gaivoronski, Alexei A. & Krylov, Sergiy & van der Wijst, Nico, 2005. "Optimal portfolio selection and dynamic benchmark tracking," European Journal of Operational Research, Elsevier, vol. 163(1), pages 115-131, May.
    6. Eugene F. Fama & Kenneth R. French, 2010. "Luck versus Skill in the Cross-Section of Mutual Fund Returns," Journal of Finance, American Finance Association, vol. 65(5), pages 1915-1947, October.
    7. Martijn Cremers & Antti Petajisto, 2006. "How Active is Your Fund Manager? A New Measure That Predicts Performance," Yale School of Management Working Papers amz2370, Yale School of Management, revised 01 May 2009.
    8. Diana Barro & Elio Canestrelli, 2009. "Tracking error: a multistage portfolio model," Annals of Operations Research, Springer, vol. 165(1), pages 47-66, January.
    9. 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.
    10. K. J. Martijn Cremers & Antti Petajisto, 2009. "How Active Is Your Fund Manager? A New Measure That Predicts Performance," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3329-3365, September.
    11. Guastaroba, G. & Speranza, M.G., 2012. "Kernel Search: An application to the index tracking problem," European Journal of Operational Research, Elsevier, vol. 217(1), pages 54-68.
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