An evolutionary heuristic for the index tracking problem

Index tracking is a popular form of passive fund management. The index tracking problem is the problem of reproducing the performance of a stock market index, but without purchasing all of the stocks that make up the index. Our formulation of the problem explicitly includes transaction costs (associated with buying or selling stocks) and a limit on the total transaction cost that can be incurred. Our formulation also includes a constraint limiting the number of stocks that can be purchased. An evolutionary heuristic (population heuristic) is presented for the solution of the index tracking problem. Reduction tests are also presented. Computational results are presented for five data sets drawn from major world markets. These data sets are made publicly available for use by other workers.