Index tracking with utility enhanced weighting
Article
Clark, E., Deshmukh, N., Güran, C. and Kassimatis, K. 2019. Index tracking with utility enhanced weighting. Quantitative Finance. 19 (11), pp. 1893-1904. https://doi.org/10.1080/14697688.2019.1605189
Type | Article |
---|---|
Title | Index tracking with utility enhanced weighting |
Authors | Clark, E., Deshmukh, N., Güran, C. and Kassimatis, K. |
Abstract | Passive index investing involves investing in a fund that replicates a market index. Enhanced indexation uses the returns of an index as a reference point and aims at outperforming this index. The motivation behind enhanced indexing is that the indices and portfolios available to academics and practitioners for asset pricing and benchmarking are generally inefficient and, thus, susceptible to enhancement. In this paper we propose a novel technique based on the concept of cumulative utility area ratios and the Analytic Hierarchy Process (AHP) to construct enhanced indices from the DJIA and S&P500. Four main conclusions are forthcoming. First, the technique, called the utility enhanced tracking technique (UETT), is computationally parsimonious and applicable for all return distributions. Second, if desired, cardinality constraints are simple and computationally parsimonious. Third, the technique requires only infrequent rebalancing, monthly at the most. Finally, the UETT portfolios generate consistently higher out-of-sample utility profiles and after-cost returns for the fully enhanced portfolios as well as for the enhanced portfolios adjusted for cardinality constraints. These results are robust to varying market conditions and a range of utility functions. |
Keywords | Investments; Portfolio allocation; Asset management ; Utility functions; Index tracking; AHP |
Publisher | Taylor & Francis (Routledge) |
Journal | Quantitative Finance |
ISSN | 1469-7688 |
Electronic | 1469-7696 |
Publication dates | |
Online | 11 Jun 2019 |
02 Nov 2019 | |
Publication process dates | |
Deposited | 09 Apr 2019 |
Accepted | 29 Mar 2019 |
Accepted author manuscript | |
Copyright Statement | This is an Accepted Manuscript of an article published by Taylor & Francis in Quantitative Finance on 11/06/2019, available online: http://www.tandfonline.com/10.1080/14697688.2019.1605189 |
Digital Object Identifier (DOI) | https://doi.org/10.1080/14697688.2019.1605189 |
Web of Science identifier | WOS:000472414200001 |
Language | English |
https://repository.mdx.ac.uk/item/88361
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