Genetic Mimicking Portfolios for ETF Arbitrage
Financial markets are full of securities whose price depends on other securities that are often difficult to trade. We develop a method to identify a liquid mimicking portfolio that tracks a de facto non-tradable asset. Our method combines a genetic algorithm with non-negative least squares. We apply it to the corporate ETF market. An arbitrage portfolio that takes a short position in the ETF with the highest price relative to its net asset value and a long position in the mimicking portfolio generates a Sharpe ratio of 3. The return on the mimicking portfolio correlates negatively with the return on the short position, is responsible for about one-third of the Sharpe ratio, and reduces expected tail loss by two-thirds.
Authors
- Niek Stevens
- Åvald Åslaugson Sommervoll (ORCID: https://orcid.org/0000-0001-5232-5630)
- Dag Einar Sommervoll
- Julio A. Crego
- Jens Soerlie Kvaerner
Institutions
- BI Norwegian Business School (NO)
- OsloMet – Oslo Metropolitan University (NO)
- Norwegian University of Science and Technology (NO)
- Business Roundtable (US)
- Norwegian University of Life Sciences (NO)
- Universidade Nova de Lisboa (PT)
Publication Details
- Journal
- The Journal of Fixed Income
- Published
- 2026-02-14
- DOI
- https://doi.org/10.3905/jfi.2026.1.225
- Primary Topic
- Stock Market Forecasting Methods
- Type
- article
- Field-Weighted Citation Impact
- 0.00