Portfolio frontiers with restrictions to tracking error volatility and value at risk

Giulio Palomba () and Luca Riccetti

Journal of Banking & Finance, 2012, vol. 36, issue 9, 2604-2615

Abstract: Asset managers are often given the task of restricting their activity by keeping both the value at risk (VaR) and the tracking error volatility (TEV) under control. However, these constraints may be impossible to satisfy simultaneously because VaR is independent of the benchmark portfolio. The management of these restrictions is likely to affect portfolio performance and produces a wide variety of scenarios in the risk-return space. The aim of this paper is to analyse various interactions between portfolio frontiers when risk managers impose joint restrictions upon TEV and VaR. Specifically, we provide analytical solutions for all the intersections and we propose simple numerical methods when such solutions are not available. Finally, we introduce a new portfolio frontier.

Keywords: Risk management; Asset allocation; Portfolio frontiers; Tracking error volatility (TEV); Value at risk (VaR) (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (16)

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Related works:
Working Paper: Portfolio Frontiers with Restrictions to Tracking Error Volatility and Value at Risk (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:9:p:2604-2615

DOI: 10.1016/j.jbankfin.2012.05.014

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