Empirical Research Of Optimized Index Fund: Dynamical Construction Of Enhanced Index Fund

Optimized Index Fund is managed by the active indexing style which is the combination of active management and indexing management. Specifically, Optimized Index Fund can be divided into Enhanced Index Fund and Style Index Fund. The management method taken by Optimized Index Fund is to adjust the active shares of the assets in the portfolio to pursue excessive yield with tracking error constraints, while traditional Index Fund is to replicate the index fully.Firstly, this paper analyzes the current situation of domestic Index Fund and discovers that the main type of Optimized Fund is Enhanced Index Fund. This actuality is related to the developmental level of domestic security market. Domestic security market is a weakly efficient market and relatively volatile. From practical comparison, Enhanced Index Funds in our country do exhibit their advantages, especially when the market is volatile. However, due to the lack of complete index system and rich financial derivatives, this advantage is not persistent and stableThis paper tries to construct a Dynamically Enhanced Index Fund with Jorion's Constant Tracking Error Constraint Model (2003) and adds the constraint of short sell into original model in order to research the realistic situation in our country.The empirical result contains four main conclusions. (1) Investing space becomes much smaller after adding constraint of short sell, and the performance of new fund is close to Passive Index Fund. (2) It is necessary to frequently adjust the shares of stocks in the portfolio to realize the goal of active investing management. (3) The returns of the fund without constraint of short sell is sensitive to the changes in constraint of Tracking Error Volatility, while the fund with constraint of short sell is not.(4) With the constraint of short sell, the ex post Tracking Error of fund departs the set goal a lot.According to the analysis of empirical result, this paper puts forward the suggestions about enriching index products, propelling the reform of transaction system and quickening the steps of creation of financial derivatives.