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Tracking error: Ex ante versus ex post measures

Author

Listed:
  • SE Satchell

    (Faculty of Economics and Politics, Austin Robinson Building)

  • S Hwang

    (Faculty of Economics and Politics, Austin Robinson Building)

Abstract

In this paper we show that ex ante and ex post tracking errors must necessarily differ, since portfolio weights are ex post stochastic in nature. In particular, ex post tracking error is always larger than ex ante tracking error. Our results imply that fund managers always have a higher ex post tracking error than their planned tracking error, and thus unless our results are considered, any performance fee based on ex post tracking error is unfavourable to fund managers.

Suggested Citation

  • SE Satchell & S Hwang, 2001. "Tracking error: Ex ante versus ex post measures," Journal of Asset Management, Palgrave Macmillan, vol. 2(3), pages 241-246, December.
    • Handle: RePEc:pal:assmgt:v:2:y:2001:i:3:d:10.1057_palgrave.jam.2240049
    DOI: 10.1057/palgrave.jam.2240049
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    Citations

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    Cited by:

    1. Auer, Benjamin R. & Schuhmacher, Frank & Niemann, Sebastian, 2023. "Cloning mutual fund returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 90(C), pages 31-37.
    2. Luca Riccetti, 2012. "Using tracking error volatility to check active management and fee level of investment funds," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 14(3), pages 139-158.
    3. Jezek, M., 2009. "Passive Investors, Active Traders and Strategic Delegation of Price Discovery," Cambridge Working Papers in Economics 0951, Faculty of Economics, University of Cambridge.
    4. Carol Alexander & Anca Dimitriu, 2003. "Equity Indexing: Conitegration and Stock Price Dispersion: A Regime Switiching Approach to market Efficiency," ICMA Centre Discussion Papers in Finance icma-dp2003-02, Henley Business School, University of Reading.
    5. Nadima El-Hassan & Paul Kofman, 2003. "Tracking Error and Active Portfolio Management," Australian Journal of Management, Australian School of Business, vol. 28(2), pages 183-207, September.

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