Mixed-integer programming approaches for index tracking and enhanced indexation (with N.A.Canakgoz) European Journal of Operational Research vol.196, 2009, pp384-399
We consider the problem of reproducing the performance of a stock market index, but without purchasing all of the stocks that make up the index, index tracking. We also consider the problem of out-performing the index, enhanced indexation. We present mixed-integer linear programming formulations of these problems. Our formulations include transaction costs, a constraint limiting the number of stocks that can be purchased and a limit on the total transaction cost that can be incurred. As our formulations of these problems are mixed-integer linear programs we can use a standard solver (Cplex). Numeric results are presented for eight data sets drawn from major markets. The largest of these data sets involves over 2000 stocks.
Keywords: index tracking; enhanced indexation; passive fund management
Full paper from ScienceDirect
J E Beasley