Optimization Letters

, Volume 8, Issue 7, pp 1961–1984 | Cite as

Market neutral portfolios

Original Paper

Abstract

In this paper we consider the problem of constructing a market neutral portfolio. This is a portfolio of financial assets that (ideally) exhibits performance independent from that of an underlying market as represented by a benchmark index. We formulate this problem as a mixed-integer nonlinear program, minimising the absolute value of the correlation between portfolio return and index return. Our model is a flexible one that incorporates decisions as to both long and short positions in assets. Computational results, obtained using the software package Minotaur, are given for constructing market neutral portfolios for eleven different problem instances derived from universes defined by S&P international equity indices. We also compare our approach against an alternative approach based on minimising the absolute value of regression slope (the zero-beta approach).

Keywords

Market neutral portfolio Mixed-integer nonlinear program Zero-beta 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Mathematical SciencesBrunel UniversityUxbridgeUK
  2. 2.Business SchoolImperial CollegeLondonUK

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