Dynamic tracking error with shortfall control using stochastic programming

Diana Barro (d.barro@unive.it) and Elio Canestrelli
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Diana Barro: Department of Economics, University Of Venice C� Foscari

No 2012_18, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

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 (search for similar items in EconPapers)
JEL-codes: C61 C63 G11 (search for similar items in EconPapers)
Pages: 16
Date: 2012, Revised 2012
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