Downside risk in multiperiod tracking error models

Diana Barro () and Elio Canestrelli
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Diana Barro: Department of Economics, University Of Venice C� Foscari

No 2012_17, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: The recent crisis made it evident that replicating the performance of a benchmark is not a sufficient goal to meet the expectations of usually risk-averse investors. The manager should also consider that the investor are seeking for a downside protection when the benchmark performs poorly and thus they should integrate a form of downside risk control. We propose a multiperiod double tracking error portfolio model which combines these two goals and provide enough flexibility. In particular, the control of the downside risk is carried out through the presence of a floor benchmark with respect to which we can accept different levels of shortfall. The choice of a proper measure for downside risk leads to different problem formulations and investment strategies which can reflect different attitudes towards risk. The proposed model is tested through a set of out-of-sample rolling simulation in different market conditions.

Keywords: Tracking error; Downside risk; Dynamic portfolio; Stochastic programming (search for similar items in EconPapers)
JEL-codes: C61 C63 G11 (search for similar items in EconPapers)
Pages: 23
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Downside risk in multiperiod tracking error models (2014)
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