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Tracking error: ex-ante versus ex-post measures

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Hwang, Soosung and Satchell, S. (Stephen) (2001) Tracking error: ex-ante versus ex-post measures. Working Paper. Coventry: Warwick Business School, Financial Econometrics Research Centre. Working papers (Warwick Business School. Financial Econometrics Research Centre) (No.01-).

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Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...

Abstract

In this paper we show that ex-ante and ex-post tracking errors must necessarily differ, since portfolio weights are ex-post stochastic in nature. In particular, ex-post tracking error is always larger than ex-ante tracking error. Our results imply that fund managers always have a higher ex-post tracking error than their planned tracking error, and thus unless our results are considered, any performance fee based on ex-post tracking error is unfavourable to fund managers.

Item Type:

Working or Discussion Paper (Working Paper)

Subjects:

H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management

Divisions:

Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School

Library of Congress Subject Headings (LCSH):

Risk management, Portfolio management, Indexation (Economics), Stochastic analysis

Series Name:

Working papers (Warwick Business School. Financial Econometrics Research Centre)

Publisher:

Warwick Business School, Financial Econometrics Research Centre

Place of Publication:

Coventry

Official Date:

2001

Dates:

Date	Event
2001	Published

Number:

No.01-

Number of Pages:

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

References:

Baierl, G. T. and P. Chen, 2000, “Choosing Managers and Funds,” Journal of Portfolio Management 26(2), 47-53.
Gardner, D. and D. Bowie, 2000, M Brooks and M. Cumberworth,
“Predicted Tracking Errors Fact or Fantasy?,” Faculty and Institute of Actuaries, Investment Conference paper, 25-27 June 2000.
Grinold, R. and R. Kahn, 1995, Active Portfolio Management, Irwin.
Gupta, F., R. Prajogi, and E. Stubbs, 1999, “The Information Ratio and Performance,” Journal of Portfolio Management (Fall 1999), 33-39.
Larsen, G. A. and B. G. Resnick,, 1998, “Empirical Insights on Indexing,” Journal of Portfolio Management 25(1), 51-60.
Lawton-Browne, C. L. 2001, Cross-reference, Journal of Asset
Management.
Markowitz, H. M., 1959, Portfolio Selection, 1st Edition, New York: John Wiley & Sons.
Pope, P. and P. K. Yadav, 1994, “Discovering Error in Tracking Error,” Journal of Portfolio Management (Winter 1994), 27-32.
Roll, R., 1992, “A Mean/Variance Analysis of Tracking Error,” Journal of Portfolio Management, 13-22.
Rudolf, M., H. Wolter, and H. Zimmermann, 1999, “A Linear Model for Tracking Error Minimization,” Journal of Banking and Finance 23, 85-103.
Sharpe, W, 1964, “Capital asset prices : A Theory of Capital Market Equilibrium under Conditions of Risk,” Journal of Finance 19, 425-442.

URI:

http://wrap.warwick.ac.uk/id/eprint/1813

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