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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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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:
DateEvent
2001Published
Number: No.01-
Number of Pages: 13
Status: Not Peer Reviewed
Access rights to Published version: Open Access (Creative Commons)

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