Differential evolution and combinatorial search for constrained index-tracking

作者：Krink Thiemo; Mittnik Stefan; Paterlini Sandra^*

来源：Annals of Operations Research, 2009, 172(1): 153-176.

DOI：10.1007/s10479-009-0552-1

• Index-tracking
• Passive asset management
• Differential evolution
• Combinatorial search

Index-tracking is a low-cost alternative to active portfolio management. The implementation of a quantitative approach, however, is a major challenge from an optimization perspective. The optimal selection of a group of assets that can replicate the index of a much larger portfolio requires both to find the optimal subset of assets and to fine-tune their weights. The former is a combinatorial, the latter a continuous numerical problem. Both problems need to be addressed simultaneously, because whether or not a selection of assets is promising depends on the allocation weights and vice versa. Moreover, the problem is usually of high dimension. Typically, an optimal Subset of 30-150 positions out of 100-600 need to be selected and their weights determined. Search heuristics can be a valuable alternative to traditional methods, which often cannot deal with the problem. In this paper, we propose a new optimization method, which is partly based on Differential Evolution (DE) and on combinatorial search. The main advantage of our method is that it can tackle the index-tracking problem as complex as it is, generating accurate and robust results.

• 出版日期2009-11