A Jackknife Estimator for Tracking Error Variance of Optimal Portfolios Constructed Using Estimated Inputs1

52 Pages Posted: 10 May 2004 Last revised: 20 Jul 2010

See all articles by Gopal Basak

Gopal Basak

University of Bristol - Department of Mathematics

Tongshu Ma

Binghamton University

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Date Written: April 2004

Abstract

We develop a jackknife estimator for the conditional variance of a minimum-tracking- error-variance portfolio constructed using estimated covariances. We empirically evaluate the performance of our estimator using an optimal portfolio of 200 stocks that has the lowest tracking error with respect to the S&P500 benchmark when three years of daily return data are used for estimating covariances. We find that our jackknife estimator provides more precise estimates and suffers less from in-sample optimism when compared to conventional estimators.

Suggested Citation

Basak, Gopal K. and Ma, Tongshu and Jagannathan, Ravi, A Jackknife Estimator for Tracking Error Variance of Optimal Portfolios Constructed Using Estimated Inputs1 (April 2004). NBER Working Paper No. w10447. Available at SSRN: https://ssrn.com/abstract=533006

Gopal K. Basak

University of Bristol - Department of Mathematics ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Tongshu Ma

Binghamton University ( email )

PO Box 6001
Binghamton, NY 13902-6000
United States

Ravi Jagannathan (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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