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Correlation versus Cointegration: Do Cointegration based - Index-Tracking Portfolios perform better? Evidence from the Swedish Stock-Market

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  • Klaus Grobys

    (KLARNA AB, Stockholm)

Abstract

Passive portfolio management which aims to replicate a stock index faces basically two different optimization methods. Traditional portfolio management employs historical stock return data of preselected stocks in order to replicate the underlying stock index. The cointegration method employs time series data of stock prices instead, even though stock price data may statistically often exhibit random walk behavior. In this review the advantage of the latter method could be asserted. Thereby, different stock portfolios with respect to the Swedish stock market are constructed which rest upon both, the concept of correlation and the concept of cointegration. The cointegration based models dominate, which can be ascertained by comparing their Sharpe ratios as well as their Treynor ratios. The dominating stock portfolio beat the index by 79.08% within the overall 10-years out-of-sample period, whereas the annual volatility on average was 1.10 base points lower.

Suggested Citation

  • Klaus Grobys, 2010. "Correlation versus Cointegration: Do Cointegration based - Index-Tracking Portfolios perform better? Evidence from the Swedish Stock-Market," Zeitschrift für Nachwuchswissenschaftler - German Journal for Young Researchers, Zeitschrift für Nachwuchswissenschaftler - German Journal for Young Researchers, vol. 2(1), pages 72-78, May.
    • Handle: RePEc:znw:papers:zfn-2010-1-124
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    References listed on IDEAS

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    1. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    2. Carol Alexander & Anca Dimitriu, 2005. "Indexing, cointegration and equity market regimes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(3), pages 213-231.
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    Cited by:

    1. Sant’Anna, Leonardo R. & Filomena, Tiago P. & Caldeira, João F., 2017. "Index tracking and enhanced indexing using cointegration and correlation with endogenous portfolio selection," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 146-157.
    2. Martin Boďa & Mária Kanderová, 2020. "Performance of Six Sigma Rebalancing for Portfolios Mixing Polar Investment Styles," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 68(1), pages 139-155.

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    More about this item

    Keywords

    Cointegration models; Index tracking; Quasi-maximum-likelihood estimation; Correlation models;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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