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No arbitrage and a linear portfolio selection model

Author

Listed:
  • Renato Bruni

    () (Università di Roma “Sapienza”, Dip. di Ingegneria Informatica, Automatica e Gestionale)

  • Francesco Cesarone

    () (Università degli Studi Roma Tre, Dip. di Studi Aziendali)

  • 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

We 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.

Suggested Citation

  • 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.
  • Handle: RePEc:ebl:ecbull:eb-13-00221
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    File URL: http://www.accessecon.com/Pubs/EB/2013/Volume33/EB-13-V33-I2-P117.pdf
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    References listed on IDEAS

    as
    1. 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 "Marco Biagi".
    2. 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.
    3. 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.
    4. 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.
    5. N. Meade & J. E. Beasley, 2011. "Detection of momentum effects using an index out-performance strategy," Quantitative Finance, Taylor & Francis Journals, vol. 11(2), pages 313-326.
    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. 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 & Andrea Scozzari & Fabio Tardella, 2015. "Linear vs. quadratic portfolio selection models with hard real-world constraints," Computational Management Science, Springer, vol. 12(3), pages 345-370, July.
    2. repec:pal:jorsoc:v:68:y:2017:i:7:d:10.1057_jors.2016.21 is not listed on IDEAS
    3. 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.

    More about this item

    Keywords

    Enhanced Index Tracking; Asset Management; Portfolio Selection; No Arbitrage; Linear Programming;

    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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