Practical Financial Optimization: A Library of GAMS Models

Chapter 7

Index Funds

7.1 Preview

In this chapter we develop the GAMS models for structuring index funds. The development is based on the discussion of Chapters PFO-7 and PFO-10. The following models are discussed in this chapter and the GAMS source code for each is given in the associated FINLIB files:

Structural index funds implements a model for creating an index fund of fixed-income securities by matching two risk factors, duration and currency, based on Section PFO-7.3.1.

• StructuralModel.gms

Co-movement index funds implements a model for creating index funds by minimizing the tracking error between the portfolio return and the target index, based on Section PFO-7.3.2.

• ComovementsModel.gms

Selective hedging for index funds creates an indexation model that provides hedging for the exchange rate risk of an international portfolio, based on Section PFO-10.5.

• SelectiveHedging.gms

We implement and test the GAMS models of this chapter using two data sets stored in Excel files:

BondIndexData.xls contains 500 simulated returns of 254 bonds from three different countries, the United States, Germany, and Switzerland. It also contains scenarios of the USD/DEM and USD/CHF exchange rate, and of the return of the target index.

 

BroadIndexData.xls contains monthly return data for 10 asset classes over a 10-year period, including cash, stock and bond indices from the international markets. We also provide monthly data of the exchange rates covering the same period.

We use the utility ...