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Tracking error with minimum guarantee constraints

In: Mathematical and Statistical Methods for Actuarial Sciences and Finance

Author

Listed:
  • Diana Barro

    (University Ca’ Foscari Venice, Department of Applied Mathematics)

  • Elio Canestrelli

    (University Ca’ Foscari Venice, Department of Applied Mathematics)

Abstract

In recent years the popularity of indexing has greatly increased in financial markets and many different families of products have been introduced. Often these products also have a minimum guarantee in the form of a minimum rate of return at specified dates or a minimum level of wealth at the end of the horizon. Periods of declining stock market returns together with low interest rate levels on Treasury bonds make it more difficult to meet these liabilities. We formulate a dynamic asset allocation problem which takes into account the conflicting objectives of a minimum guaranteed return and of an upside capture of the risky asset returns. To combine these goals we formulate a double tracking error problem using asymmetric tracking error measures in the multistage stochastic programming framework.

Suggested Citation

  • Diana Barro & Elio Canestrelli, 2010. "Tracking error with minimum guarantee constraints," Springer Books, in: Marco Corazza & Claudio Pizzi (ed.), Mathematical and Statistical Methods for Actuarial Sciences and Finance, pages 13-21, Springer.
    • Handle: RePEc:spr:sprchp:978-88-470-1481-7_2
    DOI: 10.1007/978-88-470-1481-7_2
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    Cited by:

    1. is not listed on IDEAS
    2. Valle, C.A. & Meade, N. & Beasley, J.E., 2014. "Absolute return portfolios," Omega, Elsevier, vol. 45(C), pages 20-41.

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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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