Operations Research Transactions ›› 2012, Vol. 16 ›› Issue (1): 106-114.

• Original Articles • Previous Articles     Next Articles

Factor Model Based Index Tracking and Empirical Analysis

 CHEN  Jie1,   Cui-Xue-Ting1   

  1. 1. School of Management, Fudan University, Shanghai 200433, China
  • Received:2011-09-23 Revised:2012-03-15 Online:2012-03-15 Published:2012-03-15
  • Contact: Jie CHEN E-mail:09210690025@fudan.edu.cn

Abstract: Index tracking is a popular passive investment strategy widely used by index funds and institutional investors. In this paper, we present a cardinality constrained index tracking model based on factor model. The model minimizes the variance of the portfolio with constraints on factor betas and expected excess return. Taking into account the practical investment management, we also consider restrictions on the total number of stocks selected. The result of empirical analysis suggests that, by choosing different parameters, the optimal portfolios of our model can achieve low tracking error and excess return.

Key words:  financial optimization, index fund, index tracking, factor model, Empirical analysis