• Smart Media Journal
• /
• v.10 no.3
• /
• pp.39-47
• /
• 2021

Enhanced index tracking is a problem of optimizing the objective function to generate returns above the index based on the index tracking that follows the market return. In order to avoid problems such as large transaction costs and illiquidity, we used a method of constructing a portfolio by selecting only some of the stocks included in the index. Commonly used enhanced index tracking methods tried to find the optimal portfolio with only one objective function in all tested periods, but it is almost impossible to find the ultimate strategy that always works well in the volatile financial market. In addition, it is important to improve generalization performance beyond optimizing the objective function for training data due to the nature of the financial market, where statistical characteristics change significantly over time, but existing methods have a limitation in that there is no direct discussion for this. In order to solve these problems, this paper proposes ensemble learning that composes a portfolio by combining several objective functions and a 3-stage portfolio selection algorithm that can select a portfolio by applying criteria other than the objective function to the training data. The proposed method in an experiment using the S&P500 index shows Sharpe ratio that is 27% higher than the index and the existing methods, showing that the 3-stage portfolio selection algorithm and ensemble learning are effective in selecting an enhanced index portfolio.