Dynamic Tracking Error with Shortfall Control Using Stochastic Programming
Ca Foscari University of Venice - Department of Economics; SSAV
Ca Foscari University of Venice - Department of Economics
University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 18/WP/2012
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.
Number of Pages in PDF File: 16
Keywords: Dynamic portfolio optimization, Tracking error, Shortfall control
JEL Classification: C61, C63, G11
Date posted: July 28, 2012
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