Enhanced Index Tracking-an Extension of the Elton and Gruber (1976) Model
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Date
2014-05
Journal Title
Journal ISSN
Volume Title
Publisher
SCIENCEDOMAIN international
Abstract
Aims: The purpose of the study is to make a case for the development of middle-range
models for use in developing markets by modifying the Elton and Gruber (1976) model to
come up with semi-optimized index-tracking models with desirable tracking and excess
return features.
Study Design: Non-experimental empirical design.
Place and Duration of Study: Zimbabwe, Department of Finance and Department of
Insurance and Actuarial Science, covering the period between February 2009 and June
2010.
Methodology: We use weekly data of 71 industrial closing prices from the Zimbabwe
Stock Exchange (ZSE) for the period starting February 2009 to June 2010 to compare the
return and tracking performance of the adapted models against simple capitalization-
based tracking models.
Results: We find that the semi-optimized models yield tracking and excess return results
that are not statistically significantly different from simple capitalization-based models, at
the 1% significance level, yet only utilizing about half as many stocks.
Conclusion: The use of semi-optimized index-tracking models has potential to
significantly reduce transaction costs while keeping tracking error within reasonable limits.
However, their use results in inferior excess return performance on a risk-adjusted basis when compared to simple capitalization-based models. The use of the correlation
coefficient in filtering stocks to include in a tracking portfolio yields superior tracking error
results but inferior excess return results compared to the use of the ratio of beta to
idiosyncratic risk. Portfolios with higher Active Share measures produce poorer tracking
error and excess return results compared to lower Active Share portfolios. The use of
passive portfolio management strategies on the ZSE is supported by our findings.
Description
Original Research Article on Enhanced Index Tracking
Keywords
Zimbabwe, Index-tracking, Active share, Tracking error
Citation
Nyangara, D. Mazviona, B. W. Chowa, T. Enhanced Index Tracking-an Extension of the Elton and Gruber (1976) Model. British Journal of Economics, Management & Trade 4(9): 1457-1474