Development of a Stable Tracking Measure for Tehran Stock Exchange

Document Type : Original Article

Authors

1 Associate Prof, Department of Finance and Banking, Allameh Tabataba'i University, Tehran, Iran.

2 Assistant Prof, Department of Finance and Banking, Allameh Tabataba'i University, Tehran, Iran.

3 PhD. Candidate, Department of Finance and Banking, Allameh Tabataba'i University, Tehran, Iran.

Abstract

 Because an index cannot be purchased directly, it has to be rebuilt by a portfolio which is an approximation of Index. This is called index tracking. In this research, first we discuss the vital role of Tracking Quality measurments for developing tracking portfolio via optimization based on sampling. Then we introduce a new measurement, Realized Tracking Quality (RTQ) and compare it with traditional measurements. Comparison of Realized Tracking Quality (RTQ) and three traditional measurements of producing tracking portfolios (Tracking Error Variance (TEV), Mean Squared Error (MSE) and Mean Absolute Deviation (MAD)) shows that there are significant differences in their anticipated values. In other words, we  make  a  comparison  of  the  approaches  to  index  tracking and highlighting  their advantages and disadvantages. Unlike other researches on rebuilding of tracking portfolio, this framework specifically addresses issues of stability of the tracking quality measurements, whether they produce tracking portfolios with the same tracking quality in the estimation period and the investment period or not. In fact, we were not looking for a method that would create the best tracking portfolio with the highest tracking quality; instead, this study attempted to compare the results of the estimation period with the investment period and determine which one would be more stable. The results indicate that Producing tracking portfolio will be optimized by improving stability measurements. For our analysis, we use Tehran Stock Exchange Index having all listed companies. The time period includes 5 years, between September 2012 and September 2017.

Keywords

References

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