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Index tracking and enhanced indexing using cointegration and correlation with endogenous portfolio selection

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  • Sant’Anna, Leonardo R.
  • Filomena, Tiago P.
  • Caldeira, João F.

Abstract

This article investigates the out-of-sample performance of cointegration and correlation methods for index tracking (IT) and enhanced indexing (EIT) strategies applied to Brazilian and U.S. market data. Our goal is to compare both methods as we strongly explore cointegration in relation to previous studies: we make the portfolio selection endogenous to the problem for this approach. The tests are performed using data from 2004 to 2014 with samples of 57 assets for Brazilian data and 96 assets for U.S. data; portfolios are built using combinations of at most 10 of these assets. Despite the extensive tests carried out, the overall result shows similar performance for both methods. For IT in the Brazilian market, there was a trade-off between better tracking error and higher turnover for cointegration (with the opposite for correlation), this pattern was not clear in the U.S. market. The outcome for the EIT also does not clearly favor cointegration or correlation.

Suggested Citation

  • Sant’Anna, Leonardo R. & Filomena, Tiago P. & Caldeira, João F., 2017. "Index tracking and enhanced indexing using cointegration and correlation with endogenous portfolio selection," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 146-157.
    • Handle: RePEc:eee:quaeco:v:65:y:2017:i:c:p:146-157
    DOI: 10.1016/j.qref.2016.08.008
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    3. Ruchika Sehgal & Aparna Mehra, 2023. "Quantile Regression Based Enhanced Indexing with Portfolio Rebalancing," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 21(3), pages 721-742, September.
    4. Oliveira, Alexandre Silva de & Ceretta, Paulo Sergio & Albrecht, Peter, 2023. "Performance comparison of multifractal techniques and artificial neural networks in the construction of investment portfolios," Finance Research Letters, Elsevier, vol. 55(PA).
    5. Ruchika Sehgal & Aparna Mehra, 2019. "Enhanced indexing using weighted conditional value at risk," Annals of Operations Research, Springer, vol. 280(1), pages 211-240, September.
    6. Mahdi Moeini, 2022. "Solving the index tracking problem: a continuous optimization approach," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 30(2), pages 807-835, June.
    7. Alexander Carvajal & Oscar López, 2021. "An Empirical Test of the Export-Led Model in the Member Countries of the Andean Community (Comunidad Andina de Naciones – CAN)," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 94, pages 257-272, Enero-Jun.
    8. Yang, Tingting & Huang, Xiaoxia, 2022. "Two new mean–variance enhanced index tracking models based on uncertainty theory," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    9. Jun Nakayama & Daisuke Yokouchi, 2018. "Applying Time Series Decomposition to Construct Index-Tracking Portfolio," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 25(4), pages 341-352, December.
    10. Sant'Anna, Leonardo Riegel & de Oliveira, Alan Delgado & Filomena, Tiago Pascoal & Caldeira, João Frois, 2020. "Solving the index tracking problem based on a convex reformulation for cointegration," Finance Research Letters, Elsevier, vol. 37(C).

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    More about this item

    Keywords

    Index tracking; Enhanced index tracking; Cointegration; Correlation;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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