This issuePrevious ArticleVariational inequalities and a transport planning for an elastic and continuum modelNext ArticleA class of stochastic mathematical programs with complementarity constraints: reformulations and algorithms
Index-plus-alpha tracking under concave transaction cost
We will propose a new scheme to construct an
index-plus-alpha portfolio which outperforms a given index by a
small positive amount alpha. Among such methods is index tilting
where the weight of an index tracking portfolio is slightly
modified by taking into account the various information about
individual assets. However, portfolios generated by these methods
need not outperform the index, particularly when we compare the
performance on the net basis, i.e., return after subtracting the
transaction cost.
 
The method to be proposed in this paper is to calculate a
portfolio which keeps track of an index-plus-alpha portfolio with
minimal transaction cost. The problem is formulated as a concave
minimization under linear constraints, which can be solved in an
efficient manner by a branch and bound algorithm. We will
demonstrate that this method can usually outperform the given
index when alpha is chosen in an appropriate manner.