Rebalancing index tracking portfolios with cumulative sum (CUSUM) control charts

Abstract

In this study, we use the cumulative sum (CUSUM) control chart methodology to regulate index tracking portfolio updates over time, as we seek to make the rebalancing decision endogenous to the portfolio selection problem. We use data from two stock markets (United States and Brazil), and we estimate CUSUM based portfolios as well as portfolios using fixed rebalancing time windows. We also provide a comparison with the exponentially weighted moving average (EWMA) control chart methodology. Our findings show the suitability of CUSUM, in a dynamic condition in which we have more portfolio updates when tracking performance is poor (usually during periods when markets have more volatility) and lower updates when tracking performance is effective.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 For the methodology in detail regarding the relationship among κ, h, ARL₀ and ARL₁, and the estimation of h and ARL₀ after defining κ and ARL₁, we refer the reader to Rogerson (2006).

2 http://www.b3.com.br/en_us/market-data-and-indices/indices/broad-indices/ibovespa.htm, Last access in April 9th, 2019.

3 https://us.spindices.com/indices/equity/sp-100, Last access in May 25th, 2019.

Additional information

Notes on contributors

Eduardo Nesi Bubicz

Eduardo Nesi Bubicz, Master’s Degree in Finance in the School of Business at Federal University of Rio Grande do Sul (UFRGS), in Porto Alegre/Brazil, Bachelor of Science in Mechanical Engineering at UFRGS.

Tiago Pascoal Filomena

Tiago Pascoal Filomena, Associate Professor in the School of Business at Federal University of Rio Grande do Sul (UFRGS), PhD in Engineering at George Washington University, Master’s Degree in Industrial Engineering at UFRGS, Bachelor of Science in Engineering at UFRGS.

Leonardo Riegel Sant’Anna

Leonardo Riegel Sant’Anna, Professor in the School of Business at Federal University of Rio Grande do Sul (UFRGS), Doctorate in Finance in the School of Business at UFRGS, Master’s Degree in Operations Research in the School of Business at UFRGS, Bachelor of Science in Economics at UFRGS.

Eduardo Bered Fernandes Vieira

Eduardo Bered Fernandes Vieira, Doctorate Student in Finance in the School of Business at UFRGS, Master’s Degree in Finance in the School of Business at UFRGS, Bachelor of Science in Mechanical Engineering at UFRGS.