A new MILP formulation for rebalancing enhanced index-tracking portfolios

Strub, Oliver (10 December 2017). A new MILP formulation for rebalancing enhanced index-tracking portfolios. In: Proceedings of the 2017 IEEE International Conference on Industrial Engineering and Engineering Management. Singapore. 10.-13.12.2017. 10.1109/IEEM.2017.8290040

Text A New MILP Formulation for Rebalancing Enhanced Index-Tracking Portfolios.pdf - Published Version Restricted to registered users only Available under License Publisher holds Copyright. Download (1MB)

The enhanced index-tracking problem consists of revising, i.e., rebalancing, a portfolio such that it achieves a given excess return over a financial index and minimizes the tracking error, i.e., the deviation of the portfolio returns from the index returns. Several mixed-integer linear programming (MILP) formulations of this problem have been proposed. However, these formulations may lead to portfolios with a negative excess return or a high tracking error. We present a new MILP formulation to rebalance a portfolio such that it replicates the value development of an appropriately constructed tracking target over a historical in-sample period. The resulting portfolios achieve a high excess return and a low tracking error, both in-sample and out-of-sample, which is demonstrated in a computational experiment based on 27 real-world problem instances.

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