Index tracking using Two-tail Mixed Conditional Value-at-risk in Tehran Stock Exchange

Passive management is an investing strategy that tracks a market value-weighted index or portfolio. It seeks to minimize the cost of investment fees and to avoid undesirable repercussions of the unpredictability of future trends. Active portfolio management tries to beat the market while passive portfolio management pursues a similar risk-return pattern to that of the market index. Index tracking is a passive investment strategy in the stock market that aims to make a portfolio using constituents of an index. It seeks to mimic its behavior without purchasing all of its constituents. This study aimed to track Tehran Exchange Dividend & Price Index (TEDPIX).

In this study, portfolios were tracked and their performances were examined by applying a two-tail mixed conditional value-at-risk model (main model). Optimizing TMCVaR is a linear program that minimizes the upper deviation and the downside deviation from the benchmark index. The investigated sample included the weekly data gathered from 2011/3/21 to 2018/20/3. The data was divided into 26-time frames including 52 in-sample data and 12 out-of-sample data.

Statistical tests confirmed the portfolios resulting from the main model were successful in tracking the index. As a result, the investigated model was recognized as capable of tracking the index. However, due to the tracking error and information ratio, the two models were not statistically different. In the present study, the two models showed the same performance in tracking the index.

In this study, a linear mathematical programming model was proposed to form index tracking portfolios. The results showed that although the main model was successful in index-tracking it did not outperform the mean absolute deviation model in terms of reduction in tracking error and increasing information ratio.