Tracking Nifty: A Cointegration Based Approach

Abstract

This paper deals with formulation of Partially Replicating Index Tracking Portfolio with the use of cointegration. The paper is partly a replication of Christian L. Dunis & Richard Ho (2005) with Indian stock market data. As NIFTY is an index based on free float market capitalization, a simple stock selection procedure of selecting stocks with highest market capitalization are used. Also progressively moving window portfolios are created and the dynamics of the portfolios are analyzed over a testing period of fourteen months. The essence of this study is to create a tracking portfolio in simple regression based approach which does not need any optimization. The resulting portfolio, as based on long-run cointegrating relationship, does not require frequent rebalancing and saves turnover cost.

Keywords: Tracking, portfolio, NIFTY, cointegration

JEL Classification: G10, G11,