Research on Index Portfolio Optimized Replication Model Based on Liquidity Penalty Factor

The stock and portfolio liquidity are directly relating to the impact cost of portfolio adjustments, with the lack of depth in the market, it may cause the failure of index replication. In order to solve this problem, under the condition of considering that there is no worse tracking error, more funds are allocated on liquid assets by combining with the liquidity risk. In this paper, an optimized replication model based on liquidity penalty factor is established to control the impact cost of market, reduce the tracking error and improve the return rate of portfolio, and Hu-Shen 300 security index is taken as an example to indicate the feasibility and necessity of liquidity improved method under the condition that there is no obviously worse index tracking effect.