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Dynamic Tracking Error with Shortfall Control Using Stochastic Programming

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Mathematical and Statistical Methods for Actuarial Sciences and Finance

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Abstract

In this contribution we tackle the issue of portfolio management combining benchmarking and risk control. We propose a dynamic tracking error problem and we consider the problem of monitoring at discrete points the shortfalls 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 proposed model allows for a great flexibility in the combination of the tracking goal and the downside risk protection. We provide the results of out-of-sample simulation experiments, on real data, for different portfolio configurations and different market conditions.

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Author information

Authors and Affiliations

  1. Department of Economics and SSAV, University Ca’ Foscari Venice, Cannaregio 873, 30121, Venice, Italy

    Diana Barro

  2. Department of Economics, University Ca’ Foscari Venice, Cannaregio873, 30121, Venice, Italy

    Elio Canestrelli

Authors
  1. Diana Barro
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  2. Elio Canestrelli
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Corresponding author

Correspondence to Diana Barro .

Editor information

Editors and Affiliations

  1. Department of Economics, Ca’ Foscari University of Venice, Venice, Italy

    Marco Corazza  & Claudio Pizzi  & 

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Barro, D., Canestrelli, E. (2014). Dynamic Tracking Error with Shortfall Control Using Stochastic Programming. In: Corazza, M., Pizzi, C. (eds) Mathematical and Statistical Methods for Actuarial Sciences and Finance. Springer, Cham. https://doi.org/10.1007/978-3-319-02499-8_4

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