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Enhanced Index-Tracking Strategies Based on Systemic Financial Shocks: A Comparison of Countries Versus Sectors Investments

Received: 29 November 2021     Accepted: 16 December 2021     Published: 24 December 2021
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Abstract

Since the launch of the first replicating funds in the 1970s, index-linked strategies have captured the interest of equity investors. On the one hand, active investing does not generally lead to higher risk-adjusted returns than a passive approach. On the other hand, passive vehicles cannot optimize the risk exposure to the equity markets without introducing elements of active management. The enhanced index-tracking offers all the advantages of traditional passive investing but aims to generate better returns than the reference benchmark. However, in the last decades, the financial system integration increased, reducing the diversification opportunities across markets, and meanwhile, more and more frequent extreme events affected the world. This amplified systemic instability caused unsatisfactory results even for these investment strategies. To better manage the markets turmoil and reduce losses, we propose alternative portfolio designs to improve the traditional index-tracking techniques. We include the systemic risks directly into the enhanced indexation problem and impose a minimum guaranteed extra-return on the benchmark with turnover control. The analysis builds on country and industry allocation policies in selected European markets from January 2004 to October 2021. Our findings prove that the proposed strategies generate consistent excess returns over the benchmark and outperform other indexing strategies and the equally weighted and risk parity portfolios.

Published in International Journal of Economics, Finance and Management Sciences (Volume 9, Issue 6)
DOI 10.11648/j.ijefm.20210906.17
Page(s) 260-270
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2021. Published by Science Publishing Group

Keywords

Enhanced Index Tracking, Downside Risk, Systemic Risks, European Market, Sector VS Country Allocation

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Cite This Article
  • APA Style

    Massimiliano Kaucic, Giorgio Valentinuz, Rosario Maggistro, Michele Morganti. (2021). Enhanced Index-Tracking Strategies Based on Systemic Financial Shocks: A Comparison of Countries Versus Sectors Investments. International Journal of Economics, Finance and Management Sciences, 9(6), 260-270. https://doi.org/10.11648/j.ijefm.20210906.17

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    ACS Style

    Massimiliano Kaucic; Giorgio Valentinuz; Rosario Maggistro; Michele Morganti. Enhanced Index-Tracking Strategies Based on Systemic Financial Shocks: A Comparison of Countries Versus Sectors Investments. Int. J. Econ. Finance Manag. Sci. 2021, 9(6), 260-270. doi: 10.11648/j.ijefm.20210906.17

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    AMA Style

    Massimiliano Kaucic, Giorgio Valentinuz, Rosario Maggistro, Michele Morganti. Enhanced Index-Tracking Strategies Based on Systemic Financial Shocks: A Comparison of Countries Versus Sectors Investments. Int J Econ Finance Manag Sci. 2021;9(6):260-270. doi: 10.11648/j.ijefm.20210906.17

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  • @article{10.11648/j.ijefm.20210906.17,
      author = {Massimiliano Kaucic and Giorgio Valentinuz and Rosario Maggistro and Michele Morganti},
      title = {Enhanced Index-Tracking Strategies Based on Systemic Financial Shocks: A Comparison of Countries Versus Sectors Investments},
      journal = {International Journal of Economics, Finance and Management Sciences},
      volume = {9},
      number = {6},
      pages = {260-270},
      doi = {10.11648/j.ijefm.20210906.17},
      url = {https://doi.org/10.11648/j.ijefm.20210906.17},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20210906.17},
      abstract = {Since the launch of the first replicating funds in the 1970s, index-linked strategies have captured the interest of equity investors. On the one hand, active investing does not generally lead to higher risk-adjusted returns than a passive approach. On the other hand, passive vehicles cannot optimize the risk exposure to the equity markets without introducing elements of active management. The enhanced index-tracking offers all the advantages of traditional passive investing but aims to generate better returns than the reference benchmark. However, in the last decades, the financial system integration increased, reducing the diversification opportunities across markets, and meanwhile, more and more frequent extreme events affected the world. This amplified systemic instability caused unsatisfactory results even for these investment strategies. To better manage the markets turmoil and reduce losses, we propose alternative portfolio designs to improve the traditional index-tracking techniques. We include the systemic risks directly into the enhanced indexation problem and impose a minimum guaranteed extra-return on the benchmark with turnover control. The analysis builds on country and industry allocation policies in selected European markets from January 2004 to October 2021. Our findings prove that the proposed strategies generate consistent excess returns over the benchmark and outperform other indexing strategies and the equally weighted and risk parity portfolios.},
     year = {2021}
    }
    

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    T1  - Enhanced Index-Tracking Strategies Based on Systemic Financial Shocks: A Comparison of Countries Versus Sectors Investments
    AU  - Massimiliano Kaucic
    AU  - Giorgio Valentinuz
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    AU  - Michele Morganti
    Y1  - 2021/12/24
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    DO  - 10.11648/j.ijefm.20210906.17
    T2  - International Journal of Economics, Finance and Management Sciences
    JF  - International Journal of Economics, Finance and Management Sciences
    JO  - International Journal of Economics, Finance and Management Sciences
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    EP  - 270
    PB  - Science Publishing Group
    SN  - 2326-9561
    UR  - https://doi.org/10.11648/j.ijefm.20210906.17
    AB  - Since the launch of the first replicating funds in the 1970s, index-linked strategies have captured the interest of equity investors. On the one hand, active investing does not generally lead to higher risk-adjusted returns than a passive approach. On the other hand, passive vehicles cannot optimize the risk exposure to the equity markets without introducing elements of active management. The enhanced index-tracking offers all the advantages of traditional passive investing but aims to generate better returns than the reference benchmark. However, in the last decades, the financial system integration increased, reducing the diversification opportunities across markets, and meanwhile, more and more frequent extreme events affected the world. This amplified systemic instability caused unsatisfactory results even for these investment strategies. To better manage the markets turmoil and reduce losses, we propose alternative portfolio designs to improve the traditional index-tracking techniques. We include the systemic risks directly into the enhanced indexation problem and impose a minimum guaranteed extra-return on the benchmark with turnover control. The analysis builds on country and industry allocation policies in selected European markets from January 2004 to October 2021. Our findings prove that the proposed strategies generate consistent excess returns over the benchmark and outperform other indexing strategies and the equally weighted and risk parity portfolios.
    VL  - 9
    IS  - 6
    ER  - 

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Author Information
  • Department of Economics, Business, Mathematics and Statistics, University of Trieste, Trieste, Italy

  • Department of Economics, Business, Mathematics and Statistics, University of Trieste, Trieste, Italy

  • Department of Economics, Business, Mathematics and Statistics, University of Trieste, Trieste, Italy

  • Macro & Market Research – Strategy, Generali Insurance Asset Management Società per Azioni, Trieste, Italy

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