16 Pages Posted: 28 Jul 2012
Date Written: 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.
Keywords: Dynamic portfolio optimization, Tracking error, Shortfall control
JEL Classification: C61, C63, G11
Suggested Citation: Suggested Citation
Barro, Diana and Canestrelli, Elio, Dynamic Tracking Error with Shortfall Control Using Stochastic Programming (2012). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 18/WP/2012. Available at SSRN: https://ssrn.com/abstract=2118681 or http://dx.doi.org/10.2139/ssrn.2118681