Index Tracking and Enhanced Indexation Using a Parametric Approach
Esan Graduate School of Business
John R. Birge
University of Chicago - Booth School of Business
June 18, 2014
Journal of Economics, Finance & Administrative Science, Vol. 19, No. 36, 2014
Based on the work of Brandt et al. (2009), we formulate an index tracking and enhanced indexation model using a parametric approach. The portfolio weights are modeled as functions of assets characteristics and similarity measures of the assets with the index to track. This approach permits handling nonlinear and nonconvex objectives functions that are difficult to incorporate in existing index tracking and enhanced indexation models. Additionally, this approach gives the investor more information about the portfolio holdings since the optimization is performed over portfolio strategies. Finally, an empirical implementation and an analysis of selected characteristics are presented for the S&P500 index.
Number of Pages in PDF File: 26
Keywords: Index tracking, Enhanced indexation, ParametricAccepted Paper Series
Date posted: June 19, 2014
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