Construction and Back-Testing of an Indexed Portfolio by Using Constrained Regression with Transaction Costs, Weight Constraints, and Asset Turnover in the Iranian Capital Market

Document Type : Research Paper

Author

Faculty of Economics, University of Tehran, Tehran, Iran.

10.22059/ier.2025.396848.1008254

Abstract

This paper considers 5 large stocks for retail investors and 14 stocks that cover almost the entire market for institutional investors to build an indexed portfolio. This research uses a constrained regression approach to build this portfolio for a 1-year and 2-year period, taking into account real-world constraints including transaction costs, asset turnover in the portfolio, and weight constraints. First, the companies under study are introduced, and then their performance over the entire period is examined. Second, the portfolio weights are updated in 21-day periods for one year and two years. Third, a t-test is run to statistically evaluate the performance of this portfolio with the overall index. The results show that in the two-year and one-year periods, these portfolios have statistically significantly outperformed the overall index. It seems that by balancing the portfolio weights in a periodic manner, one can achieve better performance than the overall index. Therefore, this approach can be suitable for retail and institutional investors.
 

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Main Subjects

References

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Iranian Economic Review
Volume 29, Issue 2
June 2025
Pages 738-765

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