Empirical Insights on Indexing

Larsen, Glen A.; Resnick, Bruce G.

doi:10.3905/jpm.1998.409656

Cited by 50 publications

(20 citation statements)

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“…Part of the problem here is that accurate measurement of transactions costs, with the market mechanisms prevalent in the United States, is difficult. For example, Larsen and Resnick (1998) discuss tracking error obtained through optimisation but assume that there are no transactions costs.…”

Section: Resultsmentioning

confidence: 99%

The Relevance of Index Funds for Pension Investment in Equities

Shah¹

1999

Policy Research Working Papers

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The rise of index funds has been one of the most remarkable phenomena in the fund industry over the last 25 years. The traditional rationale for the success of index funds is based on market efficiency, net of transactions costs. In addition, we focus on the role played by agency conflicts between fund managers and investors, which are hard to resolve given the low power of statistical tests of performance.Most of the empirical evidence about the superiority of index funds is from the United States. We discuss issues in the application of index funds in developing countries and the policy issues in the financial sector that impact on the enabling market infrastructure for index funds. Finally, we apply these ideas to thinking about the relevance of index funds in pension investment. The Idea of Index FundsIn the decades of the 1960s and 1970s, many studies indicated that actively managed funds−which seek to obtain excess returns by actively forecasting returns on individual stocks−do not actually obtain statistically significant excess returns. This was consistent with the hypothesis of "market efficiency," which suggested that obtaining excess returns should be difficult in a competitive market. Tracking error summarises the extent to which the index fund is able to accurately track the index. Index fund managers seek to minimise tracking error. From the viewpoint of an investor, an index fund that experiences a large tracking error is a source of risk since it might not replicate the returns on the index in the future. The Rationale for Index FundsTraditional fund managment has been based on the premise that the fund manager adds value through continuous efforts at improving risk−adjusted returns by forecasting returns. Index funds are counter−intuitive in that they make no such effort. The index fund manager makes no attempt at returns forecasting; his or her only goal is to replicate index returns. Why might index funds be more attractive? The arguments can be summarised under two basic issues: 3

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Section: Resultsmentioning

confidence: 99%

The Relevance of Index Funds for Pension Investment in Equities

Shah¹

1999

Policy Research Working Papers

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“…The Euclidean norm yields a quadratic tracking error measure, see for example Roll (1992) and Larsen Jr and Resnik (1998).…”

Section: Tracking Error Measures and Modelsmentioning

confidence: 99%

Tracking error: a multistage portfolio model

Barro

Canestrelli

2008

Ann Oper Res

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We study multistage tracking error problems. Different tracking error measures, commonly used in static models, are discussed as well as some problems which arise when we move from static to dynamic models. We are interested in dynamically replicating a benchmark using only a small subset of assets, considering transaction costs due to rebalancing and introducing a liquidity component in the portfolio. We formulate and solve a multistage tracking error model in a stochastic programming framework. We numerically test our model by dynamically replicating the MSCI Euro index. We consider an increasing number of scenarios and assets and show the superior performance of the dynamically optimized tracking portfolio over static strategies

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“…the tracking error. Additionally, single-factor and Markowitz models (Larsen-Jr and Resnick, 1998;Rohweder, 1998;Wang, 1999) have been used to replicate the performance of an index. Furthermore, the use of the cointegration concept in building portfolios for index tracking is highlighted by Alexander and Dimitriu (2002) and Dunis and Ho (2005).…”

Section: Problem Formulationmentioning

confidence: 99%