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Dynamic Tracking Error with Shortfall Control Using Stochastic Programming

16 Pages Posted: 28 Jul 2012  

Diana Barro

Ca Foscari University of Venice - Dipartimento di Economia; SSAV

Elio Canestrelli

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: 2012

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.

Keywords: Dynamic portfolio optimization, Tracking error, Shortfall control

JEL Classification: C61, C63, G11

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

Diana Barro (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

SSAV ( email )

Venice
Italy

Elio Canestrelli

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

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