Tracking Error in Index Funds
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Date
2011-04
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The British University in Dubai (BUiD)
Abstract
The present research investigates the tracking error in UAE index funds and explores the tracking error related models. Five tracking models were used and divided into two major types. The first type is the Quadratic tracking Error Model which extensively studied by (Roll, 1992) and included one model. The second type is the Mean Absolute Deviation Tracking Error Models and covers four models. Mean Absolute Deviation Tracking Error Model is following linear programming methods (Rudolf, Hurgen, & Heinz, 1999).
The empirical data were collected from Emirates Securities Market (ESM). Four major funds have been studied and analyzed. Tracking error models have been implemented on the funds using the historical net asset values (NAVs). Each model has been implemented separately on each fund to investigate the effect on the percentage of the differences between the fund’s returns and benchmark’s returns.
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Keywords
index funds, United Arab Emirates (UAE), quadratic tracking error model, mean absolute deviation Tracking Error Model, Emirates Securities Market (ESM), Net Asset Values (NAVs)