The Threshold Accepting Heuristic for Index Tracking

18 Pages Posted: 18 Dec 2008

See all articles by Manfred Gilli

Manfred Gilli

University of Geneva - Research Center for Statistics; Swiss Finance Institute

Evis Kellezi

affiliation not provided to SSRN

Date Written: May 24, 2001

Abstract

We investigate the performance of the threshold accepting heuristic for the index tracking problem. The index tracking problem consists in minimizing the tracking error between a portfolio and a benchmark. The objective is to replicate the performance of a given index upon the condition that the number of stocks allowed in the portfolio is smaller than the number of stocks in the benchmark index. Transaction costs are incurred each time that the portfolio is rebalanced. We find the composition of a portfolio that tracks the performance of the benchmark during a given period in the past and compare it with the performance of the portfolio in a subsequent period. We report computational results in the cases where the benchmarks are market indices tracked by a small number of assets. We find that the threshold accepting heuristic is an efficient optimization technique for this problem.

Keywords: Threshold Accepting, Heuristic Optimization, Index Tracking, Passive Fund Management

JEL Classification: C61, C63, G11

Suggested Citation

Gilli, Manfred and Kellezi, Evis, The Threshold Accepting Heuristic for Index Tracking (May 24, 2001). Available at SSRN: https://ssrn.com/abstract=1317358 or http://dx.doi.org/10.2139/ssrn.1317358

Manfred Gilli (Contact Author)

University of Geneva - Research Center for Statistics ( email )

Geneva
Switzerland
+41223798222 (Phone)
+41223798299 (Fax)

HOME PAGE: http://www.unige.ch/ses/metri/gilli/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Evis Kellezi

affiliation not provided to SSRN ( email )

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