[R-SIG-Finance] index tracking

Adams, Zeno Zeno.Adams at ebs.edu
Tue Sep 29 08:59:02 CEST 2009

>>I'm after suggestions for the design of simple index-tracking models.
I >>have access to good clean data, and I am trying to cook up
portfolios >>which replicate indices with a minimum number of long
positions when >>rebalancing is done daily.

I think a nice way to replicate an index using only a few long positions
is to use equities that are cointegrated with the index. An example is
given in Carol Alexander's (2001) book: "Market Models. A Guide to
Financial Data Analysis" Ch.12. This can be done in R using Paff's urca
package. You may also want to look at his book "Analysis of Integrated
and Cointegrated Time Series with R". If done correctly, you don't even
have to rebalance on a daily basis.


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