Dynamic Index Tracking via Stochastic Programming

Patrizia Beraldi, Antonio Violi, Maria Bruni, Gianluca Carrozzino

2019

Abstract

Index tracking (IT) is an investment strategy aimed at replicating the performance of a given financial index, taken as benchmark, over a given time horizon. This paper deals with the IT problem by proposing a stochastic programming model where the tracking error is measured by the Conditional Value at Risk (CVaR) measure. The multistage formulation overcomes the myopic view of the static models considering a longer time horizon and provides a more flexible paradigm where the initial strategy can be revised to account for changed market conditions. The proposed formulation presents a bi-objective function, where the two conflicting criteria wealth maximization and risk minimization, are jointly accounted for by properly choosing the weight to attribute to the two terms. The model is encapsulated within a rolling horizon scheme and solved iteratively exploiting each time the more update information in the generation of the scenario tree. The preliminary computational experiments carried out by considering as benchmark the Italian index FSTE-MIB seem to be promising and show that, on an out-of-sample analysis, the tracking portfolios follow the benchmark very closely, overcoming it on the long run.

Paper Citation

in Harvard Style

Beraldi P., Violi A., Bruni M. and Carrozzino G. (2019). Dynamic Index Tracking via Stochastic Programming.In Proceedings of the 8th International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES, ISBN 978-989-758-352-0, pages 443-450. DOI: 10.5220/0007573404430450

in Bibtex Style

@conference{icores19,
author={Patrizia Beraldi and Antonio Violi and Maria Bruni and Gianluca Carrozzino},
title={Dynamic Index Tracking via Stochastic Programming},
booktitle={Proceedings of the 8th International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES,},
year={2019},
pages={443-450},
publisher={SciTePress},
organization={INSTICC},
doi={10.5220/0007573404430450},
isbn={978-989-758-352-0},
}

in EndNote Style

TY - CONF

JO - Proceedings of the 8th International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES,
TI - Dynamic Index Tracking via Stochastic Programming
SN - 978-989-758-352-0
AU - Beraldi P.
AU - Violi A.
AU - Bruni M.
AU - Carrozzino G.
PY - 2019
SP - 443
EP - 450
DO - 10.5220/0007573404430450