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Portfolio Frontiers with Restrictions to Tracking Error Volatility and Value at Risk

  • Giulio PALOMBA

    ([n.a.])

  • Luca RICCETTI

    ()

    (Universita' Politecnica delle Marche, Dipartimento di Economia)

Asset managers are often given the task of restricting their activity by keeping both the value at risk (VaR) and the tracking error volatility (TEV) under control. However, these constraints can not always be simultaneously satisfied because the VaR is independent of the benchmark portfolio. The management of these restrictions is likely to affect portfolio performances and produces a wide variety of scenarios in the risk-return space. The aim of this paper is to analyse various interactions between portfolio frontiers when restrictions upon TEV and VaR are jointly imposed. Analytical solutions for the intersections are provided and short numerical methods are proposed when solutions are not available. Finally, a new portfolio frontier is introduced.

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File URL: http://docs.dises.univpm.it/web/quaderni/pdf/358.pdf
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Paper provided by Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali in its series Working Papers with number 358.

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Length: 34
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:anc:wpaper:358
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  1. Gaivoronski, Alexei A. & Krylov, Sergiy & van der Wijst, Nico, 2005. "Optimal portfolio selection and dynamic benchmark tracking," European Journal of Operational Research, Elsevier, vol. 163(1), pages 115-131, May.
  2. Isabelle Bajeux‚ÄźBesnainou & Riadh Belhaj & Didier Maillard & Roland Portait, 2011. "Portfolio Optimization Under Tracking Error And Weights Constraints," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 34(2), pages 295-330, 06.
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  5. K. J. Martijn Cremers & Antti Petajisto, 2009. "How Active Is Your Fund Manager? A New Measure That Predicts Performance," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3329-3365, September.
  6. 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.
  7. Ravi Jagannathan & Tongshu Ma, 2003. "Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps," Journal of Finance, American Finance Association, vol. 58(4), pages 1651-1684, 08.
  8. 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.
  9. Alexander, Gordon J. & Baptista, Alexandre M., 2008. "Active portfolio management with benchmarking: Adding a value-at-risk constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 779-820, March.
  10. Sid Browne, 1999. "Beating a moving target: Optimal portfolio strategies for outperforming a stochastic benchmark," Finance and Stochastics, Springer, vol. 3(3), pages 275-294.
  11. Campbell, Rachel & Huisman, Ronald & Koedijk, Kees, 2001. "Optimal portfolio selection in a Value-at-Risk framework," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1789-1804, September.
  12. Luca RICCETTI, 2010. "Minimum Tracking Error Volatility," Working Papers 340, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  13. Phelim Boyle & Weidong Tian, 2007. "Portfolio Management With Constraints," Mathematical Finance, Wiley Blackwell, vol. 17(3), pages 319-343.
  14. 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.
  15. 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.
  16. 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.
  17. Giulio Palomba, 2008. "Multivariate GARCH models and the Black-Litterman approach for tracking error constrained portfolios: an empirical analysis," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 10(4), pages 379-413.
  18. Martijn Cremers & Antti Petajisto, 2006. "How Active is Your Fund Manager? A New Measure That Predicts Performance," Yale School of Management Working Papers amz2370, Yale School of Management, revised 01 May 2009.
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