Mean-variance portfolio selection with tracking error penalization - ENSAE Paris Accéder directement au contenu
Pré-Publication, Document De Travail Année : 2020

Mean-variance portfolio selection with tracking error penalization

Résumé

This paper studies a variation of the continuous-time mean-variance portfolio selection where a tracking-error penalization is added to the mean-variance criterion. The tracking error term penalizes the distance between the allocation controls and a refe\-rence portfolio with same wealth and fixed weights. Such consideration is motivated as fo\-llows: (i) On the one hand, it is a way to robustify the mean-variance allocation in case of misspecified parameters, by ``fitting" it to a reference portfolio that can be agnostic to market parameters; (ii) On the other hand, it is a procedure to track a benchmark and improve the Sharpe ratio of the resulting portfolio by considering a mean-variance criterion in the objective function. This problem is formulated as a McKean-Vlasov control problem. We provide explicit solutions for the optimal portfolio strategy and asymptotic expansions of the portfolio strategy and efficient frontier for small values of the tracking error parameter. Finally, we compare the Sharpe ratios obtained by the standard mean-variance allocation and the penalized one for four different reference portfolios: equal-weights, minimum-variance, equal risk contributions and shrinking portfolio. This comparison is done on a simulated misspecified model, and on a backtest performed with historical data. Our results show that in most cases, the penalized portfolio outperforms in terms of Sharpe ratio both the standard mean-variance and the reference portfolio.
Fichier principal
Vignette du fichier
MVref.pdf (490.3 Ko) Télécharger le fichier
Origine : Fichiers produits par l'(les) auteur(s)

Dates et versions

hal-02941289 , version 1 (16-09-2020)
hal-02941289 , version 2 (17-09-2020)

Identifiants

  • HAL Id : hal-02941289 , version 2

Citer

Willliam Lefebvre, Gregoire Loeper, Huyên Pham. Mean-variance portfolio selection with tracking error penalization. 2020. ⟨hal-02941289v2⟩
99 Consultations
513 Téléchargements

Partager

Gmail Facebook X LinkedIn More