Index Tracking and Enhanced Indexation Using a Parametric Approach

26 Pages Posted: 19 Jun 2014  

Luis Chavez-Bedoya

Esan Graduate School of Business

John R. Birge

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 18, 2014

Abstract

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.

Keywords: Index tracking, Enhanced indexation, Parametric

Suggested Citation

Chavez-Bedoya, Luis and Birge, John R., Index Tracking and Enhanced Indexation Using a Parametric Approach (June 18, 2014). Journal of Economics, Finance & Administrative Science, Vol. 19, No. 36, 2014. Available at SSRN: https://ssrn.com/abstract=2456318

Luis Chavez-Bedoya (Contact Author)

Esan Graduate School of Business ( email )

Alonso de Molina 1652
Monterrico
Lima, Surco
Peru

John R. Birge

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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