TRACKING NIFTY: A COINTEGRATION BASED APPROACH

Published: 09-06-2021| Version 1 | DOI: 10.17632/w9374663f5.1
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This paper deals with formulation of Partially Replicating Index Tracking Portfolio with the use of cointegration. The paper is partly a replication of Christian L. Dunis & Richard Ho (2005) [published in Journal of Asset Management, Vol. 6, 1, page 33-52] with Indian stock market data. As NIFTY is an index based on free float market capitalization, a simple stock selection procedure of selecting stocks with highest market capitalization are used. Also progressively moving window portfolios are created and the dynamics of the portfolios are analyzed over a testing period of fourteen months. The essence of this study is to create a tracking portfolio in simple regression based approach which does not need any optimization. The resulting portfolio, as based on long- run cointegrating relationship, does not require frequent re-balancing and saves turnover cost.

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