Stock indexes and indexing portfolios in China stock markets
Hai Wang · 2002
With the approach of principal component analysis, the main indexes are studied to determine if they can reflect the stock market change of the Shanghai Stock Exchange or the Shenzhen Stock Exchange. The results indicate that the two composite indexes and two A share indexes can accurately reflect the market changes, and other indexes are not so good in this function. Because all the four indexes are not good investment portfolios, we need to make indexing portfolios to track them. With the theory of APT and the approaches of statistics and optimization, we choose principal components as factors, make the factor loadings of tracking portfolios the same as the indexes, and then let the sum of squared differences of residuals minimized in the sample period to obtain the weight of each stock in the portfolio. About 20 stocks are selected from every market to obtain the tracking portfolio with specified weight. The indexing portfolios have almost the same returns as the indexes both in the sample period and after sample period (three months) .