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Dynamic tracking error with shortfall control using stochastic programming

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Author Info

  • Diana Barro

    ()
    (Department of Economics, University Of Venice Cà Foscari)

  • Elio Canestrelli

    (Department of Economics, University Of Venice Cà Foscari)

Abstract

In this contribution we propose a dynamic tracking error problem and we consider the problem of monitoring at discrete point the shortfall of the portfolio below a set of given reference levels of wealth. We formulate and solve the resulting dynamic optimization problem using stochastic programming. The resulting problem allows for a great flexibility in the combination of a tracking goal and a downside risk protection through a discrete monitoring of the shortfalls. We provide the results of a out-of-sample simulation experiments, on real data, for different portfolio configurations and different market conditions.

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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2012_18.

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Length: 16
Date of creation: 2012
Date of revision: 2012
Handle: RePEc:ven:wpaper:2012_18

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Keywords: Dynamic portfolio optimization; Tracking error; Shortfall;

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  1. Hiroshi Konno & Hiroaki Yamazaki, 1991. "Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market," Management Science, INFORMS, vol. 37(5), pages 519-531, May.
  2. Alexander, Gordon J. & Baptista, Alexandre M., 2006. "Portfolio selection with a drawdown constraint," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3171-3189, November.
  3. Alexei Chekhlov & Stanislav Uryasev & Michael Zabarankin, 2005. "Drawdown Measure In Portfolio Optimization," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(01), pages 13-58.
  4. Rudolf, Markus & Wolter, Hans-Jurgen & Zimmermann, Heinz, 1999. "A linear model for tracking error minimization," Journal of Banking & Finance, Elsevier, vol. 23(1), pages 85-103, January.
  5. Domenico Cuoco & Hua He & Sergei Isaenko, 2004. "Optimal Dynamic Trading Strategies with Risk Limits," Yale School of Management Working Papers amz2567, Yale School of Management.
  6. Bertsimas, Dimitris & Lauprete, Geoffrey J. & Samarov, Alexander, 2004. "Shortfall as a risk measure: properties, optimization and applications," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1353-1381, April.
  7. repec:ebl:ecbull:v:4:y:2005:i:16:p:1-9 is not listed on IDEAS
  8. M. A. H. Dempster & M. Germano & E. A. Medova & M. I. Rietbergen & F. Sandrini & M. Scrowston, 2007. "Designing minimum guaranteed return funds," Quantitative Finance, Taylor & Francis Journals, vol. 7(2), pages 245-256.
  9. Udo Ebert, 2005. "Measures of downside risk," Economics Bulletin, AccessEcon, vol. 4(16), pages 1-9.
  10. Diana Barro & Elio Canestrelli, 2005. "Tracking Error: a multistage portfolio model," GE, Growth, Math methods 0510012, EconWPA.
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