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Index Mutual Fund Replication

  • Jin Zhang
  • Dietmar Maringer
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    This paper discusses the application of an index tracking technique to mutual fund replication problems. By using a tracking error (TE) minimization method and two tactical rebalancing strategies (i.e. the calendar based strategy and the tolerance triggered strategy), a multi-period fund tracking model is developed that replicates S&P 500 mutual fund returns. The impact of excess returns and loss aversion on overall tracking performance is also discussed in two extended cases of the original TE optimization respectively. An evolutionary method, namely Differential Evolution, is used for optimizing the asset weights. According to the experiment results, it is found that the proposed model replicates the first two moments of the fund returns by using only five equities. The TE optimization strategy under loss aversion with tolerance triggered rebalancing dominates other combinations studied with regard to tracking ability and cost efficiency.

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    File URL: http://comisef.eu/files/wps035.pdf
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    Paper provided by COMISEF in its series Working Papers with number 035.

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    Length: 26 pages
    Date of creation: 17 May 2010
    Date of revision:
    Handle: RePEc:com:wpaper:035
    Contact details of provider: Web page: http://www.comisef.eu

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    1. William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 39, pages 119.
    2. 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.
    3. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
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