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64

Table 1 - Monte Carlo comparison of Factor and OLS on retuns based index replication (N=50, r1=5, r2=5) Naive 1 mean std.dev. mad supmod ncomp nvar 3.89
0.58

Naive 2 2.50
15.90

Naive 3

Factor 1

Factor 2 0.63
0.03

Factor 3 0.54
0.03

20.65
4.53

In sample (1-500) 1.43 1.25

16.60 0.05

49.91
4.73

46.29
7.13

49.14
7.59

7.05
0.05

4.28
0.04

4.19
0.04

41.45
3.93

38.47
5.87

40.69
6.23

5.68
0.04

3.44
0.03

3.36
0.03

163.51
14.35

165.56
32.84

181.15
35.83

22.39
0.15

13.64
0.13

13.40
0.12

3.81
0.40

8.38
6.21

7.54
4.64

3.89
0.58

8.38
6.21

7.54
4.64

mean std.dev. mad supmod

-3.26
8.27

33.99
24.45

Out of sample (501-1000) 27.05 -0.14

23.47 0.26

0.11
0.16

-0.04
0.15

54.28
4.64

61.16
15.34

65.51
15.80

10.89
0.10

6.26
0.08

6.09
0.07

45.13
3.75

50.95
12.70

54.39
13.05

9.02
0.09

5.17
0.07

5.01
0.06

186.80
17.43

213.87
58.71

221.59
58.73

38.85
0.36

22.58
0.27

22.04
0.25

mean std.dev. mad supmod

-0.45
7.15

21.16
13.93

Out of sample (501-750) 19.00 -0.21

13.41 0.19

0.15
0.12

0.01
0.11

39.52
3.51

40.68
7.91

44.29
8.50

8.28
0.07

4.97
0.05

4.89
0.05

32.69
2.84

34.14
6.73

37.22
7.26

6.80
0.06

4.06
0.05

3.98
0.04

136.45
14.47

143.71
31.24

152.05
32.13

29.26
0.25

17.63
0.19

17.35
0.18

mean std.dev. mad supmod

-6.08
10.00

46.83
35.16

Out of sample (751-1000) 35.10 -0.07

34.14 0.36

0.07
0.22

-0.09
0.21

40.07
4.11

47.04
13.19

51.75
13.59

8.33
0.07

4.96
0.05

4.86
0.05

33.13
3.20

39.64
11.36

43.53
11.67

6.84
0.06

4.04
0.05

3.96
0.04

180.92
17.13

209.28
58.69

215.09
58.48

37.52
0.36

21.78
0.27

21.24
0.25

Notes
FactorX indicates the factor based replica using factors extracted from the variance covariance matrix of raw data (Base, X=3), of the first autocovariance matrix (AC, X=2), or from the variance covariance matrix of a 50 period moving average of the data (BPF, NaveX indicates the OLS on returns based replica, using the same variables as in FactorX, X=1,2,3. Mean is the mean error of replications, std.dev. the standard deviation, mad the mean absolute deviation, supmod the sup of the mo Ncomp is the number of factors included in the factor model, nvar the number of variables included in the replica The figures are averages over 5000 replications. Monte Carlo standard errors are reported in smaller fonts.

Table 2 - Monte Carlo comparison of Factor and OLS on returns based index replication (N=50, r1=2, r2=8) Naive 1 mean std.dev. mad supmod ncomp nvar 2.48
2.79

Naive 2 23.23
11.81

Naive 3

Factor 1

Factor 2 22.07
11.80

Factor 3 23.26
11.93

-7.85
20.88

In sample (1-500) 25.01 -10.55

11.94 20.84

75.56
18.78

57.54
8.98

59.25
9.05

71.92
18.78

54.86
8.98

55.85
9.03

62.27
15.06

48.14
7.59

49.53
7.64

59.30
15.05

45.95
7.59

46.77
7.62

237.64
54.10

183.52
27.98

190.21
28.33

222.74
54.06

172.98
27.97

177.04
28.21

1.93
1.51

7.07
10.36

5.73
9.40

2.48
2.79

7.07
10.36

5.73
9.40

mean std.dev. mad supmod

-29.39
20.96

-4.95
5.16

Out of sample (501-1000) -6.33 -29.65

5.31 20.95

-4.81
5.15

-5.35
5.16

60.71
12.29

48.09
5.23

49.93
5.35

55.97
12.27

44.87
5.23

45.37
5.25

50.29
10.05

40.08
4.38

41.55
4.46

46.27
10.04

37.38
4.37

37.78
4.39

213.27
46.06

162.08
16.86

168.26
17.31

197.82
46.02

151.07
16.84

152.58
16.92

mean std.dev. mad supmod

-16.96
15.14

-1.97
3.80

Out of sample (501-750) -3.37 -17.26

4.01 15.12

-1.59
3.78

-1.87
3.79

50.03
12.31

34.92
3.81

36.08
3.86

46.97
12.30

32.62
3.80

33.11
3.82

41.05
9.92

28.98
3.16

29.91
3.20

38.47
9.91

27.05
3.15

27.45
3.17

171.90
43.82

118.29
12.09

123.63
12.53

161.34
43.79

110.41
12.06

112.07
12.15

mean std.dev. mad supmod

-41.82
27.34

-7.92
7.64

Out of sample (751-1000) -9.30 -42.05

7.74 27.32

-8.04
7.63

-8.82
7.65

42.56
7.32

36.48
4.61

38.46
4.81

39.07
7.29

34.20
4.60

34.74
4.64

34.93
5.89

30.26
3.83

31.93
4.01

31.94
5.87

28.34
3.83

28.77
3.85

205.22
43.92

156.70
16.42

162.62
16.88

190.45
43.88

146.29
16.41

147.66
16.49

Notes
FactorX indicates the factor based replica using factors extracted from the variance covariance matrix of raw data (Base, X=3), of the first autocovariance matrix (AC, X=2), or from the variance covariance matrix of a 50 period moving average of the data (BPF, NaveX indicates the OLS on returns based replica, using the same variables as in FactorX, X=1,2,3. Mean is the mean error of replications, std.dev. the standard deviation, mad the mean absolute deviation, supmod the sup of the mo Ncomp is the number of factors included in the factor model, nvar the number of variables included in the replica The figures are averages over 5000 replications. Monte Carlo standard errors are reported in smaller fonts.

Table 3 - Monte Carlo comparison of Factor and OLS on returns based index replication (N=50, r1=8, r2=2) Naive 1 mean std.dev. mad supmod ncomp nvar 5.88
0.93

Naive 2 52.32
26.96

Naive 3

Factor 1

Factor 2 0.22
0.01

Factor 3 0.22
0.01

22.65
28.85

In sample (1-500) 34.91 0.51

20.41 0.02

112.85
43.92

91.91
29.66

57.20
12.00

5.82
0.03

3.19
0.03

3.23
0.03

96.39
38.94

75.57
24.06

47.34
9.82

4.66
0.03

2.55
0.02

2.58
0.02

340.30
106.30

304.81
95.56

195.17
49.68

18.30
0.11

10.26
0.08

10.33
0.08

5.57
0.76

11.00
5.95

10.70
5.60

5.88
0.93

11.00
5.95

10.70
5.60

mean std.dev. mad supmod

-107.04
98.86

-65.78
64.68

Out of sample (501-1000) -1.74 -0.22

3.36 0.27

0.10
0.14

0.07
0.14

101.96
28.96

106.19
29.93

72.72
17.77

11.66
0.10

5.62
0.06

5.65
0.06

81.35
21.01

86.62
23.54

59.20
13.20

9.72
0.09

4.64
0.06

4.66
0.05

396.11
149.01

391.88
132.41

239.70
56.11

40.48
0.34

20.14
0.23

20.21
0.22

mean std.dev. mad supmod

-90.73
87.14

-52.64
64.27

Out of sample (501-750) 9.50 -0.09

10.98 0.19

0.10
0.10

0.10
0.10

87.68
32.39

93.78
34.82

57.07
17.89

8.57
0.07

4.38
0.05

4.42
0.05

71.06
25.02

79.36
29.88

47.56
14.93

7.09
0.06

3.59
0.04

3.63
0.04

315.50
138.56

328.94
131.83

188.13
55.94

29.72
0.24

15.32
0.16

15.50
0.16

mean std.dev. mad supmod

-123.34
110.73

-78.92
66.71

Out of sample (751-1000) -12.98 -0.36

10.17 0.38

0.10
0.20

0.03
0.20

72.16
17.94

72.85
19.21

50.79
10.56

8.58
0.07

4.35
0.05

4.38
0.04

59.87
14.44

60.32
15.63

42.60
8.81

7.10
0.06

3.56
0.04

3.58
0.04

382.87
148.50

362.56
124.96

212.06
35.10

39.07
0.34

19.47
0.22

19.50
0.22

Notes
FactorX indicates the factor based replica using factors extracted from the variance covariance matrix of raw data (Base, X=3), of the first autocovariance matrix (AC, X=2), or from the variance covariance matrix of a 50 period moving average of the data (BPF, NaveX indicates the OLS on returns based replica, using the same variables as in FactorX, X=1,2,3. Mean is the mean error of replications, std.dev. the standard deviation, mad the mean absolute deviation, supmod the sup of the mo Ncomp is the number of factors included in the factor model, nvar the number of variables included in the replica The figures are averages over 5000 replications. Monte Carlo standard errors are reported in smaller fonts.

Table 4 - Monte Carlo comparison of Factor and OLS on returns based index replication (N=100, r1=5, r2=5 Naive 1 mean std.dev. mad supmod ncomp nvar 3.87
0.51

Naive 2 24.49
7.24

7.43
7.74

Naive 3 Factor 1 In sample (1-500) 16.88 1.40

4.51 0.04

Factor 2 0.74
0.03

Factor 3 0.64
0.03

45.76
3.66

41.48
4.60

41.41
3.06

7.21
0.05

4.38
0.05

4.35
0.04

37.63
2.90

34.17
3.73

34.14
2.47

5.81
0.04

3.52
0.04

3.49
0.03

155.90
14.24

142.75
18.16

141.56
11.75

22.83
0.15

13.99
0.16

13.93
0.13

3.83
0.39

12.04
12.90

9.18
9.75

3.87
0.51

12.04
12.90

9.18
9.75

mean std.dev. mad supmod

0.06
6.91

10.56
7.74

Out of sample (501-1000) -5.58 -0.18

6.18 0.25

-0.08
0.16

-0.02
0.16

52.42
4.18

51.83
7.75

46.16
3.14

11.15
0.10

6.46
0.09

6.30
0.08

43.77
3.45

43.55
6.64

38.43
2.58

9.25
0.09

5.33
0.08

5.18
0.07

174.87
14.10

171.72
23.56

158.78
12.09

39.73
0.34

23.01
0.30

22.77
0.27

mean std.dev. mad supmod

0.62
5.28

5.71
3.87

Out of sample (501-750) -5.44 -0.02

6.01 0.18

-0.07
0.12

0.05
0.11

39.19
3.77

37.64
5.22

35.35
3.13

8.39
0.07

5.02
0.06

4.98
0.05

32.73
3.19

31.38
4.26

29.47
2.62

6.88
0.06

4.10
0.05

4.05
0.05

130.09
12.45

122.58
14.71

120.38
11.40

29.64
0.23

17.61
0.22

17.62
0.19

mean std.dev. mad supmod

-0.51
9.06

15.42
13.49

Out of sample (751-1000) -5.71 -0.33

6.67 0.36

-0.10
0.23

-0.08
0.22

36.32
2.61

34.50
4.02

34.20
2.47

8.53
0.07

5.10
0.06

5.05
0.05

30.20
2.17

28.49
3.21

28.60
2.10

7.01
0.06

4.17
0.05

4.12
0.05

168.64
13.57

165.18
23.26

153.01
11.71

38.42
0.34

22.25
0.30

22.00
0.27

Notes
FactorX indicates the factor based replica using factors extracted from the variance covariance matrix of raw data (Base, X=3), of the first autocovariance matrix (AC, X=2), or from the variance covariance matrix of a 50 period moving average of the data (BPF, NaveX indicates the OLS on returns based replica, using the same variables as in FactorX, X=1,2,3. Mean is the mean error of replications, std.dev. the standard deviation, mad the mean absolute deviation, supmod the sup of the mo Ncomp is the number of factors included in the factor model, nvar the number of variables included in the replica The figures are averages over 5000 replications. Monte Carlo standard errors are reported in smaller fonts.

Table 5 - Monte Carlo comparison of Factor and OLS on returns based index replication (N=50, r1=5, r2=5, median) Naive 1 mean std.dev. mad supmod ncomp nvar 8.16 18.33 15.18 59.96 Naive 2 5.74 16.58 13.57 55.10 Naive 3 Factor 1 In sample (1-500) 5.70 0.67 16.37 6.25 13.55 5.00 55.42 19.89 3.81 3.89 Factor 2 0.16 3.78 3.01 12.13 Factor 3 0.16 3.55 2.83 11.43

3.89

8.38

7.54

8.38

7.54

mean std.dev. mad supmod

0.14 20.25 16.66 67.82

0.77 18.88 15.62 63.25

Out of sample (501-1000) 1.41 0.17 19.09 9.10 15.87 7.40 64.16 32.95 Out of sample (501-750) 0.70 -0.09 13.90 7.01 11.40 5.68 46.17 25.17 Out of sample (751-1000) 1.90 -0.01 13.50 7.01 11.14 5.68 60.41 31.68

0.08 4.87 3.92 17.91

0.10 4.53 3.66 17.01

mean std.dev. mad supmod

0.40 14.50 11.95 49.06

0.70 13.71 11.30 46.23

0.06 4.13 3.31 14.74

0.05 3.87 3.10 13.84

mean std.dev. mad supmod

0.57 14.69 12.06 65.21

1.07 13.65 11.22 60.17

0.04 4.13 3.31 17.01

0.06 3.91 3.14 16.15

Notes
FactorX indicates the factor based replica using factors extracted from the variance covariance matrix of raw data (Base, X=3), of the first autocovariance matrix (AC, X=2), or from the variance covariance matrix of a 50 period moving average of the data (BPF, X=1). NaveX indicates the OLS on returns based replica, using the same variables as in FactorX, X=1,2,3. Mean is the mean error of replications, std.dev. the standard deviation, mad the mean absolute deviation, supmod the sup of the modulus Ncomp is the number of factors included in the factor model, nvar the number of variables included in the replica The figures are medians over 5000 replications.

Table 6 - Monte Carlo comparison of Factor and OLS on returns based index replication (N=50, r1=5, r2=5, ncomp Naive 1 mean std.dev. mad supmod ncomp nvar 17.03
2.59

Naive 2 18.61
4.08

25.80
5.73

Naive 3 Factor 1 In sample (1-500) -162.34 0.021

127.53 0.001

Factor 2 0.003
0.000

Factor 3 0.003
0.000

56.03
5.34

39.89
2.57

101.50
39.27

1.382
0.005

0.489
0.001

0.479
0.001

46.80
4.54

32.83
2.07

76.85
27.54

1.102
0.004

0.390
0.001

0.382
0.001

179.83
16.23

136.47
9.49

437.15
200.58

4.491
0.017

1.585
0.005

1.551
0.005

10.00
0.00

36.41
2.30

36.81
2.97

17.03
2.59

36.41
2.30

36.81
2.97

mean std.dev. mad supmod

17.89
11.49

7.69
8.44

Out of sample (501-1000) -96.27 -0.052

61.83 0.020

0.012
0.004

0.002
0.004

58.47
5.26

51.37
4.23

124.12
53.46

1.585
0.007

0.545
0.001

0.531
0.002

49.12
4.49

42.93
3.49

101.45
43.31

1.271
0.006

0.435
0.001

0.424
0.001

205.34
21.06

171.56
15.62

461.94
210.73

5.719
0.030

1.864
0.006

1.822
0.007

mean std.dev. mad supmod

17.54
8.78

7.63
6.52

Out of sample (501-750) -45.87 -0.032

26.93 0.016

0.014
0.003

0.002
0.003

43.99
4.49

37.13
3.74

78.53
29.65

1.489
0.006

0.532
0.001

0.521
0.002

36.45
3.62

31.09
3.21

65.60
24.93

1.189
0.005

0.424
0.001

0.416
0.001

159.77
18.99

127.19
14.04

263.25
99.56

5.032
0.025

1.695
0.006

1.671
0.006

mean std.dev. mad supmod

-0.51
14.59

15.42
10.78

Out of sample (751-1000) -5.71 -0.332

96.78 0.027

-0.096
0.005

-0.082
0.005

41.16
3.19

35.56
2.45

107.73
48.91

1.485
0.006

0.533
0.001

0.519
0.002

34.09
2.63

29.53
2.02

90.25
41.42

1.185
0.005

0.425
0.001

0.414
0.001

199.58
20.99

166.61
15.42

457.68
210.73

5.457
0.031

1.780
0.006

1.733
0.007

Notes
FactorX indicates the factor based replica using factors extracted from the variance covariance matrix of raw data (Base, X=3), of the first autocovariance matrix (AC, X=2), or from the variance covariance matrix of a 50 period moving average of the data (BPF, X=1). NaveX indicates the OLS on returns based replica, using the same variables as in FactorX, X=1,2,3. Mean is the mean error of replications, std.dev. the standard deviation, mad the mean absolute deviation, supmod the sup of the modulus Ncomp is the number of factors included in the factor model, nvar the number of variables included in the replica The figures are averages over 5000 replications. Monte Carlo standard errors are reported in smaller fonts.

Table 7 - Percentage of variance explained by each factor Factor 1 2 3 4 5 6 7 8 9 10 1 90.39 5.27 2.78 0.94 0.28 0.17 0.08 0.04 0.03 0.01 2 88.23 4.21 3.59 1.66 0.61 0.28 0.23 0.19 0.19 0.16 3 87.96 4.22 3.63 1.63 0.62 0.31 0.24 0.22 0.19 0.19

FactorX indicates the factor based replica using factors extracted from the variance covariance matrix of raw data (Base, X=3), of the first autocovariance matrix (AC, X=2), or from the variance covariance matrix of a 2 month moving average of the data (BPF, X=1).

Table 8 - Data on Eurostoxx50, comparison of Factor and OLS on returns based index replication Naive 1 mean std.dev. mad supmod ncomp nvar -19.62 6.21 5.18 33.20 Naive 2 -11.12 5.37 4.20 21.24 Naive 3 -5.04 2.83 2.44 11.05 Factor 1 Factor 2 Factor 3 0.02 0.88 0.68 2.76 6.00 19.00 Level 1 -1.18 5.20 4.06 15.83 Level 2 0.02 0.96 0.78 2.89 Level 3 0.03 0.86 0.66 3.01

In sample (1-350) 0.10 -0.06 3.57 1.04 2.93 0.83 11.70 3.76 6.00 6.00 6.00 21.00

6.00

21.00

19.00

6.00

21.00

19.00

mean std.dev. mad supmod

-13.46 29.48 23.68 72.96

-5.36 13.67 11.44 28.13

3.44 16.73 13.67 53.48

Out of sample (351-890) 20.11 -26.84 1.08 19.56 22.28 5.25 16.05 18.98 3.81 79.40 82.80 18.12 Out of sample (351-650) 5.92 -7.56 -0.93 8.51 5.73 2.74 6.86 4.74 2.14 26.12 19.22 7.82 Out of sample (651-890) 32.38 -43.52 2.82 18.07 17.23 6.20 15.28 14.99 4.47 79.40 82.80 18.12

14.74 18.16 14.16 75.18

-24.86 19.10 16.41 68.95

2.30 6.23 4.78 23.73

mean std.dev. mad supmod

-36.55 16.54 13.86 72.96

-13.68 7.41 6.35 28.13

-9.63 5.68 4.93 21.16

4.01 9.26 7.31 21.84

-8.00 5.37 4.56 18.35

-1.53 3.09 2.43 9.30

mean std.dev. mad supmod Notes

6.51 22.90 20.57 56.28

1.84 13.76 12.69 26.20

14.75 14.78 13.10 53.48

24.03 18.85 15.88 75.18

-39.45 14.02 12.34 68.95

5.62 6.35 4.92 23.73

FactorX indicates the factor based replica using factors extracted from the variance covariance matrix of raw data (Base, X=3), of the first autocovariance matrix (AC, X=2), or from the variance covariance matrix of a 50 period moving average of the data (BPF, X=1). NaveX indicates the OLS on returns based replica, using the same variables as in FactorX, X=1,2,3. LevelX indicates the OLS on prices based replica, using the same variables as in FactorX, X=1,2,3. Mean is the mean error of replications, std.dev. the standard deviation, mad the mean absolute deviation, supmod the sup of the modulus Ncomp is the number of factors included in the factor model, nvar the number of variables included in the replica

100 5/28/1998 6/28/1998 7/28/1998 8/28/1998 9/28/1998 10/28/1998 11/28/1998 12/28/1998 1/28/1999 2/28/1999 3/28/1999 4/28/1999 5/28/1999 6/28/1999 7/28/1999 8/28/1999 9/28/1999 10/28/1999 11/28/1999 12/28/1999 1/28/2000 2/28/2000 3/28/2000 4/28/2000 5/28/2000 6/28/2000

150

200

250

300

350

Figure 1: Out of sample tracking of replication methods

Index OLS levels Factor OLS returns