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Clustering of financial time series with application to index and enhanced index tracking portfolio

  • Dose, Christian
  • Cincotti, Silvano

A stochastic-optimization technique based on time series cluster analysis is described for index tracking and enhanced index tracking problems. Our methodology solves the problem in two steps, i.e., by first selecting a subset of stocks and then setting the weight of each stock as a result of an optimization process (asset allocation). Present formulation takes into account constraints on the number of stocks and on the fraction of capital invested in each of them, whilst not including transaction costs. Computational results based on clustering selection are compared to those of random techniques and show the importance of clustering in noise reduction and robust forecasting applications, in particular for enhanced index tracking.

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File URL: http://www.sciencedirect.com/science/article/pii/S0378437105002864
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Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 355 (2005)
Issue (Month): 1 ()
Pages: 145-151

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Handle: RePEc:eee:phsmap:v:355:y:2005:i:1:p:145-151
Contact details of provider: Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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  1. Sid Browne, 1999. "Beating a moving target: Optimal portfolio strategies for outperforming a stochastic benchmark," Finance and Stochastics, Springer, vol. 3(3), pages 275-294.
  2. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  3. Rosario N. Mantegna, 1998. "Hierarchical Structure in Financial Markets," Papers cond-mat/9802256, arXiv.org.
  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.
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