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Tracking error with minimum guarantee constraints

Diana Barro () and Elio Canestrelli

No 172, Working Papers from Department of Applied Mathematics, Università Ca' Foscari Venezia

Abstract: In recent years the popularity of indexing has greatly increased in financial markets and many different families of products have been introduced. Often these products also have a minimum guarantee in the form of a minimum rate of return at specified dates or a minimum level of wealth at the end of the horizon. Period of declining stock market returns together with low interest rate levels on Treasury bonds make it more difficult to meet these liabilities. We formulate a dynamic asset allocation problem which takes into account the conflicting objectives of a minimum guaranteed return and of an upside capture of the risky asset returns. To combine these goals we formulate a double tracking error problem using asymmetric tracking error measures in the multistage stochastic programming framework.

Keywords: Minimum guarantee; benchmark; tracking error; dynamic asset allocation; scenario (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2008-11
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http://virgo.unive.it/wpideas/storage/2008wp172.pdf First version, 2008 (application/pdf)

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