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A new stochastic dominance approach to enhanced index tracking problems

Author

Listed:
  • 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.

Suggested Citation

  • 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.
  • Handle: RePEc:ebl:ecbull:eb-12-00706
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I4-P333.pdf
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    References listed on IDEAS

    as
    1. Bottazzi, Jean-Marc & Luque, Jaime & Páscoa, Mário R., 2012. "Securities market theory: Possession, repo and rehypothecation," Journal of Economic Theory, Elsevier, vol. 147(2), pages 477-500.
    2. 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".
    3. Haim Levy, 1992. "Stochastic Dominance and Expected Utility: Survey and Analysis," Management Science, INFORMS, pages 555-593.
    4. 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.
    5. repec:ebl:ecbull:v:7:y:2005:i:7:p:1-7 is not listed on IDEAS
    6. 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.
    7. Marina Murat & Davide Ferrari & Patrizio Frederic, 2012. "Immigrant students and educational systems. Cross-country evidence from PISA 2006," Department of Economics 0683, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    8. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Francesco Cesarone & Jacopo Moretti & Fabio Tardella, 2016. "Optimally chosen small portfolios are better than large ones," Economics Bulletin, AccessEcon, vol. 36(4), pages 1876-1891.
    2. Bruni, Renato & Cesarone, Francesco & Scozzari, Andrea & Tardella, Fabio, 2017. "On exact and approximate stochastic dominance strategies for portfolio selection," European Journal of Operational Research, Elsevier, vol. 259(1), pages 322-329.
    3. Francesco Cesarone & Andrea Scozzari & Fabio Tardella, 2015. "Linear vs. quadratic portfolio selection models with hard real-world constraints," Computational Management Science, Springer, pages 345-370.
    4. 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.

    More about this item

    Keywords

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

    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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