Publication: Benchmark replication portfolio strategies
Program
KU-Authors
KU Authors
Co-Authors
Zolotoy, Leon
Advisor
Publication Date
2013
Language
English
Type
Journal Article
Journal Title
Journal ISSN
Volume Title
Abstract
We propose a novel approach to the benchmark replication problem that uses a minimum tracking error variance as an objective subject to a target expected outperformance. When no budget constraint is imposed on the replicating portfolio, the solution is a two-fund portfolio involving the standard hedge portfolio and the tangent portfolio constructed using the replicating securities. In the presence of a budget constraint, the solution is a three-fund portfolio, which includes, in addition, the minimum variance portfolio constructed using the replicating securities. We implement our theoretical results using recent data for three widely followed US stock indices with very good out-of-sample performance.
Description
Source:
Journal of Asset Management
Publisher:
Palgrave Macmillan Ltd
Keywords:
Subject
Business, Finance