Active Risk Constraints for Regression Based Index Tracking

23 Pages Posted: 5 Nov 2020

See all articles by Simon du Plooy

Simon du Plooy

North West University; Corion Capital

Date Written: September 26, 2020

Abstract

Regression based index tracking selects tracking portfolios based on the linear regression characteristics of the available assets. The approach is suited to Mixed Integer Linear Programs where the number of assets in the tracking portfolio is limited compared to the number of constituents in the benchmark portfolio. Current approaches do not account for the active risk of the tracking portfolio, resulting in concentrated portfolios with high tracking error. This paper considers two extensions, both a linear and quadratic formulation, to the current approaches. The resulting portfolios are more diversified, have lower tracking error and tracking difference, and have appropriate levels of beta.

Keywords: Index tracking, Active risk, Mixed integer linear programming

JEL Classification: C61, G11

Suggested Citation

du Plooy, Simon Johannes and du Plooy, Simon Johannes, Active Risk Constraints for Regression Based Index Tracking (September 26, 2020). Available at SSRN: https://ssrn.com/abstract=3700083 or http://dx.doi.org/10.2139/ssrn.3700083

Simon Johannes Du Plooy (Contact Author)

Corion Capital ( email )

41 Sir Lowry Road
Foreshore
Cape Town, Western Cape 7925
South Africa

HOME PAGE: http://www.corion.co.za

North West University ( email )

Hoffman Street
Potchefstroom, 2520
South Africa

HOME PAGE: http://natural-sciences.nwu.ac.za/bmi

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