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Index Mutual Fund Replication

Author

Listed:
  • Jin Zhang
  • Dietmar Maringer

Abstract

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.

Suggested Citation

  • Jin Zhang & Dietmar Maringer, 2010. "Index Mutual Fund Replication," Working Papers 035, COMISEF.
    • Handle: RePEc:com:wpaper:035
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    File URL: http://comisef.eu/files/wps035.pdf
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    References listed on IDEAS

    as
    1. William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 39, pages 119-119.
    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.
    4. Stanley G Eakins & Stanley Stansell, 2007. "An examination of alternative portfolio rebalancing strategies applied to sector funds," Journal of Asset Management, Palgrave Macmillan, vol. 8(1), pages 1-8, May.
    5. Giacomo di Tollo & Dietmar Maringer, 2009. "Metaheuristics for the Index Tracking Problem," Lecture Notes in Economics and Mathematical Systems, in: Kenneth Sörensen & Marc Sevaux & Walter Habenicht & Martin Josef Geiger (ed.), Metaheuristics in the Service Industry, chapter 8, pages 127-154, Springer.
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    Cited by:

    1. Andriosopoulos, Kostas & Nomikos, Nikos, 2014. "Performance replication of the Spot Energy Index with optimal equity portfolio selection: Evidence from the UK, US and Brazilian markets," European Journal of Operational Research, Elsevier, vol. 234(2), pages 571-582.
    2. Andriosopoulos, Kostas & Doumpos, Michael & Papapostolou, Nikos C. & Pouliasis, Panos K., 2013. "Portfolio optimization and index tracking for the shipping stock and freight markets using evolutionary algorithms," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 52(C), pages 16-34.

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    More about this item

    Keywords

    Passive Portfolio Management; Fund Tracking; MultiPeriod Optimization; Differential Evolution;
    All these keywords.

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