Summary: We investigate the performance of the threshold accepting heuristic for the index tracking problem. The index tracking problem consists in minimizing the tracking error between a portfolio and a benchmark. The objective is to replicate the performance of a given index upon the condition that the number of stocks allowed in the portfolio is smaller than the number of stocks in the benchmark index. Transaction costs are incurred each time that the portfolio is rebalanced.
We find the composition of a portfolio that tracks the performance of the benchmark during a given period in the past and compare it with the performance of the portfolio in a subsequent period. We report computational results in the cases where the benchmarks are market indices tracked by a small number of assets. We find that the threshold accepting heuristic is an efficient optimization technique for this problem.
For the entire collection see [Zbl 0994.00020].