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

Massimiliano Kaucic; Giorgio Valentinuz; Rosario Maggistro; Michele Morganti

doi:doi:10.11648/j.ijefm.20210906.17

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

Massimiliano Kaucic, Giorgio Valentinuz, Rosario Maggistro, Michele Morganti

Published in International Journal of Economics, Finance and Management Sciences (Volume 9, Issue 6)

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), 2024. Published by Science Publishing Group

Keywords

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

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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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TY  - JOUR
T1  - Enhanced Index-Tracking Strategies Based on Systemic Financial Shocks: A Comparison of Countries Versus Sectors Investments
AU  - Massimiliano Kaucic
AU  - Giorgio Valentinuz
AU  - Rosario Maggistro
AU  - Michele Morganti
Y1  - 2021/12/24
PY  - 2021
N1  - https://doi.org/10.11648/j.ijefm.20210906.17
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
SP  - 260
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

Massimiliano Kaucic

Department of Economics, Business, Mathematics and Statistics, University of Trieste, Trieste, Italy
Giorgio Valentinuz

Department of Economics, Business, Mathematics and Statistics, University of Trieste, Trieste, Italy
Rosario Maggistro

Department of Economics, Business, Mathematics and Statistics, University of Trieste, Trieste, Italy
Michele Morganti

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

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Plain Text BibTeX RIS

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

Copy | Download

@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}
}

Copy | Download

TY  - JOUR
T1  - Enhanced Index-Tracking Strategies Based on Systemic Financial Shocks: A Comparison of Countries Versus Sectors Investments
AU  - Massimiliano Kaucic
AU  - Giorgio Valentinuz
AU  - Rosario Maggistro
AU  - Michele Morganti
Y1  - 2021/12/24
PY  - 2021
N1  - https://doi.org/10.11648/j.ijefm.20210906.17
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
SP  - 260
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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