Tracking error of exchange-traded funds: Evidence from the UK

This paper is mainly concerned with the tracking accuracy of Exchange Traded Funds (ETFs) listed on the London Stock Exchange (LSE) but also evaluates their performance and pricing efficiency. The findings show that ETFs offer virtually the same return but exhibit higher volatility than their benchmark. It seems that the pricing efficiency, which should come from the creation and redemption process, does not fully hold as equity ETFs show consistent price premiums. The tracking error of the funds is generally small and is decreasing over time. The risk of the ETF, daily price volatility and the total expense ratio explain a large part of the tracking error. Trading volume, fund size, bid-ask spread and average price premium or discount did not have an impact on the tracking error. Finally, it is concluded that market volatility and the tracking error are positively correlated.

Indexing stock portfolios in Brazil: tracking the IBOVESPA and the FGV 100

Indexing is a passive investment strategy in which the investor weights bis portfolio to match the performance of a broad-based indexo Since severaI studies showed that indexed portfolios have consistently outperformed active management strategies over the last decades, an increasing number of investors has become interested in indexing portfolios IateIy. Brazilian financiaI institutions do not offer indexed portfolios to their clients at this point in time. In this work we propose the use of indexed portfolios to track the performance oftwo ofthe most important Brazilian stock indexes: the mOVESPA and the FGVIOO. We test the tracking performance of our modeI by a historical simulation. We applied several statistical tests to the data to verify how many stocks should be used to controI the portfolio tracking error within user specified bounds.

On determining spectral parameters, tracking jitter, and GPS positioning improvement by scintillation mitigation

A method of determining spectral parameters p (slope of the phase PSD) and T (phase PSD at 1 Hz) and hence tracking error variance in a GPS receiver PLL from just amplitude and phase scintillation indices and an estimated value of the Fresnel frequency has been previously presented. Here this method is validated using 50 Hz GPS phase and amplitude data from high latitude receivers in northern Norway and Svalbard. This has been done both using (1) a Fresnel frequency estimated using the amplitude PSD (in order to check the accuracy of the method) and (2) a constant assumed value of Fresnel frequency for the data set, convenient for the situation when contemporaneous phase PSDs are not available. Both of the spectral parameters (p, T) calculated using this method are in quite good agreement with those obtained by direct measurements of the phase spectrum as are tracking jitter variances determined for GPS receiver PLLs using these values. For the Svalbard data set, a significant difference in the scintillation level observed on the paths from different satellites received simultaneously was noted. Then, it is shown that the accuracy of relative GPS positioning can be improved by use of the tracking jitter variance in weighting the measurements from each satellite used in the positioning estimation. This has significant advantages for scintillation mitigation, particularly since the method can be accomplished utilizing only time domain measurements thus obviating the need for the phase PSDs in order to extract the spectral parameters required for tracking jitter determination.

Análise de métodos de replicação: o caso IBOVESPA

Este artigo apresenta e implementa os principais métodos quantitativos para replicar o Índice Bovespa. Os modelos utilizados são: replicação plena, carteira de mínima variância global, Black e minimização quadrática sem venda a descoberto, cujos critérios de análise incluem os parâmetros de tracking error, beta, R-quadrado e semelhança de série em relação à média e à variância. Concluiu-se que não existe o melhor modelo na aplicação ao Ibovespa, porque todos mostraram seus méritos e suas limitações nas diversas condições simuladas, além do fato de cada administrador poder ter necessidades diferentes, mutáveis no espaço e no tempo.

Matrix Converter-Based Unified Power-Flow Controllers: Advanced Direct Power Control Method

This paper presents a direct power control (DPC) for three-phase matrix converters operating as unified power flow controllers (UPFCs). Matrix converters (MCs) allow the direct ac/ac power conversion without dc energy storage links; therefore, the MC-based UPFC (MC-UPFC) has reduced volume and cost, reduced capacitor power losses, together with higher reliability. Theoretical principles of direct power control (DPC) based on sliding mode control techniques are established for an MC-UPFC dynamic model including the input filter. As a result, line active and reactive power, together with ac supply reactive power, can be directly controlled by selecting an appropriate matrix converter switching state guaranteeing good steady-state and dynamic responses. Experimental results of DPC controllers for MC-UPFC show decoupled active and reactive power control, zero steady-state tracking error, and fast response times. Compared to an MC-UPFC using active and reactive power linear controllers based on a modified Venturini high-frequency PWM modulator, the experimental results of the advanced DPC-MC guarantee faster responses without overshoot and no steady-state error, presenting no cross-coupling in dynamic and steady-state responses.

Hybrid adaptive control of a dragonfly model

Dragonflies show unique and superior flight performances than most of other insect species and birds. They are equipped with two pairs of independently controlled wings granting an unmatchable flying performance and robustness. In this paper, it is presented an adaptive scheme controlling a nonlinear model inspired in a dragonfly-like robot. It is proposed a hybrid adaptive (HA) law for adjusting the parameters analyzing the tracking error. At the current stage of the project it is considered essential the development of computational simulation models based in the dynamics to test whether strategies or algorithms of control, parts of the system (such as different wing configurations, tail) as well as the complete system. The performance analysis proves the superiority of the HA law over the direct adaptive (DA) method in terms of faster and improved tracking and parameter convergence.

Honey, I shrunk the sample covariance matrix

The central message of this paper is that nobody should be using the samplecovariance matrix for the purpose of portfolio optimization. It containsestimation error of the kind most likely to perturb a mean-varianceoptimizer. In its place, we suggest using the matrix obtained from thesample covariance matrix through a transformation called shrinkage. Thistends to pull the most extreme coefficients towards more central values,thereby systematically reducing estimation error where it matters most.Statistically, the challenge is to know the optimal shrinkage intensity,and we give the formula for that. Without changing any other step in theportfolio optimization process, we show on actual stock market data thatshrinkage reduces tracking error relative to a benchmark index, andsubstantially increases the realized information ratio of the activeportfolio manager.

Market Index Biases and Minimum Risk Indices

Markets, in the real world, are not efficient zero-sum games where hypotheses of the CAPM are fulfilled. Then, it is easy to conclude the market portfolio is not located on Markowitz"s efficient frontier, and passive investments (and indexing) are not optimal but biased. In this paper, we define and analyze biases suffered by passive investors: the sample, construction, efficiency and active biases and tracking error are presented. We propose Minimum Risk Indices (MRI) as an alternative to deal with to market index biases, and to provide investors with portfolios closer to the efficient frontier, that is, more optimal investment possibilities. MRI (using a Parametric Value-at-Risk Minimization approach) are calculated for three stock markets achieving interesting results. Our indices are less risky and more profitable than current Market Indices in the Argentinean and Spanish markets, facing that way the Efficient Market Hypothesis. Two innovations must be outlined: an error dimension has been included in the backtesting and the Sharpe"s Ratio has been used to select the"best" MRI

Market Index Biases and Minimum Risk Indices

Markets, in the real world, are not efficient zero-sum games where hypotheses of the CAPM are fulfilled. Then, it is easy to conclude the market portfolio is not located on Markowitz"s efficient frontier, and passive investments (and indexing) are not optimal but biased. In this paper, we define and analyze biases suffered by passive investors: the sample, construction, efficiency and active biases and tracking error are presented. We propose Minimum Risk Indices (MRI) as an alternative to deal with to market index biases, and to provide investors with portfolios closer to the efficient frontier, that is, more optimal investment possibilities. MRI (using a Parametric Value-at-Risk Minimization approach) are calculated for three stock markets achieving interesting results. Our indices are less risky and more profitable than current Market Indices in the Argentinean and Spanish markets, facing that way the Efficient Market Hypothesis. Two innovations must be outlined: an error dimension has been included in the backtesting and the Sharpe"s Ratio has been used to select the"best" MRI

The Performance of European Small Cap Equity Funds

The thesis examines the risk-adjusted performance of European small cap equity funds between 2008 and 2013. The performance is measured using several measures including Sharpe ratio, Treynor ratio, Modigliani measure, Jensen alpha, 3-factor alpha and 4-factor alpha. The thesis also addresses the issue of persistence in mutual fund performance. Thirdly, the relationship between the activity of fund managers and fund performance is investigated. The managerial activity is measured using tracking error and R-squared obtained from a 4-factor asset pricing model. The issues are investigated using Spearman rank correlation test, cross-sectional regression analysis and ranked portfolio tests. Monthly return data was provided by Morningstar and consists of 88 mutual funds. Results show that small cap funds earn back a significant amount of their expenses, but on average loose to their benchmark index. The evidence of performance persistence over 12-month time period is weak. Managerial activity is shown to positively contribute to fund performance

Neurofuzzy control using Kalman filtering state feedback with coloured noise for unknown non-linear processes

This paper presents a controller design scheme for a priori unknown non-linear dynamical processes that are identified via an operating point neurofuzzy system from process data. Based on a neurofuzzy design and model construction algorithm (NeuDec) for a non-linear dynamical process, a neurofuzzy state-space model of controllable form is initially constructed. The control scheme based on closed-loop pole assignment is then utilized to ensure the time invariance and linearization of the state equations so that the system stability can be guaranteed under some mild assumptions, even in the presence of modelling error. The proposed approach requires a known state vector for the application of pole assignment state feedback. For this purpose, a generalized Kalman filtering algorithm with coloured noise is developed on the basis of the neurofuzzy state-space model to obtain an optimal state vector estimation. The derived controller is applied in typical output tracking problems by minimizing the tracking error. Simulation examples are included to demonstrate the operation and effectiveness of the new approach.

Does active management add any value?

The question as to whether active management adds any value above that of the funds investment policy is one of continual interest to investors. In order to investigate this issue in the UK real estate market we examine a number of related questions. First, how much return variability is explained by investment policy? Second, how similar are the policies across funds? Third, how much of a fund’s return is determined by investment policy? Finally, how was this added value achieved? Using data for 19 real estate funds we find that investment policy explains less than half of the variability in returns over time, nothing of the variation across funds and that more than 100% of a level of return is attributed to investment policy. The results also show UK real estate fund focus exclusively on trying to pick winners to add value and that in pursuit of active return fund mangers incur high tracking error risk, consequently, successful active management is very difficult to achieve. In addition, the results are dependent on the benchmark used to represent the investment policy of the fund. Nonetheless, active management can indeed add value to a real estate funds performance. This is the good news. The bad news is adding value is much more difficult to achieve than is generally accepted.

Adaptive recursive control of a soil testing load frame

Recursive Learning Control (RLC) has the potential to significantly reduce the tracking error in many repetitive trajectory applications. This paper presents an application of RLC to a soil testing load frame where non-adaptive techniques struggle with the highly nonlinear nature of soil. The main purpose of the controller is to apply a sinusoidal force reference trajectory on a soil sample with a high degree of accuracy and repeatability. The controller uses a feedforward control structure, recursive least squares adaptation algorithm and RLC to compensate for periodic errors. Tracking error is reduced and stability is maintained across various soil sample responses.

Risk reduction and diversification in UK commercial property portfolios

The issue of diversification in direct real estate investment portfolios has been widely studied in academic and practitioner literature. Most work, however, has been done using either partially aggregated data or data for small samples of individual properties. This paper reports results from tests of both risk reduction and diversification that use the records of 10,000+ UK properties tracked by Investment Property Databank. It provides, for the first time, robust estimates of the diversification gains attainable given the returns, risks and cross‐correlations across the individual properties available to fund managers. The results quantify the number of assets and amount of money needed to construct both ‘balanced’ and ‘specialist’ property portfolios by direct investment. Target numbers will vary according to the objectives of investors and the degree to which tracking error is tolerated. The top‐level results are consistent with previous work, showing that a large measure of risk reduction can be achieved with portfolios of 30–50 properties, but full diversification of specific risk can only be achieved in very large portfolios. However, the paper extends previous work by demonstrating on a single, large dataset the implications of different methods of calculating risk reduction, and also by showing more disaggregated results relevant to the construction of specialist, sector‐focussed funds.

Análise de desempenho de fundos de investimento no Brasil: como seus administradores adicionam valor?

O objetivo principal desta dissertação é possibilitar a compreensão do processo utilizado na avaliação de desempenho de fundos de investimento. Portanto, a dissertação pretendeu responder a seguinte questão: como se analisa o padrão de desempenho de um fundo de investimento? Para isso, foi realizado um levantamento bibliográfico onde foram selecionadas algumas metodologias de desempenho de fundos que avaliam retomo e risco simultaneamente no período como um todo, e outras com objetivo de avaliar a consistência e eficiência do desempenho de administradores de fundos em seguir sua política de investimento ao longo desse período (intra período). O estudo empírico realizado em cima de alguns fundos do mercado brasileiro permitiu a aplicação prática dos indicadores estudados. Concluímos que, um investidor, ao investir em um fundo de investimento, deve verificar seu padrão de desempenho não apenas no período como um todo como também ao longo desse período. Além disso, diferentes metodologias que avaliam o padrão de desempenho de fundos no período e intra período podem apresentar resultados diferentes.