Allocating the tracking error for the multi-asset-class fund by reconciling bottom-up model with top-down model

Korkiat Sermsakskul and Sira Suchintabandid ()
Additional contact information
Korkiat Sermsakskul: Department of Banking and Finance, Faculty of Commerce and Accountancy, Chulalongkorn University, Phyathai Road, Pathumwan, Bangkok 10330, Thailand
Sira Suchintabandid: Department of Banking and Finance, Faculty of Commerce and Accountancy, Chulalongkorn University, Phyathai Road, Pathumwan, Bangkok 10330, Thailand

International Journal of Financial Engineering (IJFE), 2023, vol. 10, issue 01, 1-29

Abstract: In a portfolio with multiple asset classes, each having its own benchmark, an alpha-seeking manager must decide how much tracking error (TE) to incur in each asset class, subject to given TE constraints. This paper helps practitioners clarify how to formulate this TE-allocation problem from a top-down perspective. By reconciling with a conceptual bottom-up formulation, we discover that the validity of the top-down model relies crucially on how one specifies the correlation structure of the asset classes’ alphas. We propose a method for estimating this correlation structure that helps users of the top-down model avoid misallocation of TEs.

Keywords: Tracking error; multi-asset-class fund; TE utilization; TE allocation (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2424786323500068
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijfexx:v:10:y:2023:i:01:n:s2424786323500068

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2424786323500068

Access Statistics for this article

International Journal of Financial Engineering (IJFE) is currently edited by George Yuan

More articles in International Journal of Financial Engineering (IJFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().