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Relative deviation metrics and the problem of strategy replication

Author

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  • Stoyanov, Stoyan V.
  • Rachev, Svetlozar T.
  • Ortobelli, Sergio
  • Fabozzi, Frank J.

Abstract

In the paper, we generalize the classical benchmark tracking problem by introducing the class of relative deviation metrics. We introduce an axiomatic description of the benchmark tracking problem and a classification inspired by the theory of probability metrics. Two examples of such metrics are provided and their in-sample behaviour is compared to the classical tracking error in a numerical example.

Suggested Citation

  • Stoyanov, Stoyan V. & Rachev, Svetlozar T. & Ortobelli, Sergio & Fabozzi, Frank J., 2008. "Relative deviation metrics and the problem of strategy replication," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 199-206, February.
    • Handle: RePEc:eee:jbfina:v:32:y:2008:i:2:p:199-206
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    References listed on IDEAS

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    1. R. Rockafellar & Stan Uryasev & Michael Zabarankin, 2006. "Generalized deviations in risk analysis," Finance and Stochastics, Springer, vol. 10(1), pages 51-74, January.
    2. Treynor, Jack L & Black, Fischer, 1973. "How to Use Security Analysis to Improve Portfolio Selection," The Journal of Business, University of Chicago Press, vol. 46(1), pages 66-86, January.
    3. Rudolf, Markus & Wolter, Hans-Jurgen & Zimmermann, Heinz, 1999. "A linear model for tracking error minimization," Journal of Banking & Finance, Elsevier, vol. 23(1), pages 85-103, January.
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    Cited by:

    1. Paskalis Glabadanidis, 2020. "Portfolio Strategies to Track and Outperform a Benchmark," JRFM, MDPI, vol. 13(8), pages 1-26, August.
    2. Alexander, Gordon J. & Baptista, Alexandre M., 2010. "Active portfolio management with benchmarking: A frontier based on alpha," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2185-2197, September.
    3. Martijn Pistorius & Mitja Stadje, 2016. "On Dynamic Deviation Measures and Continuous-Time Portfolio Optimisation," Papers 1604.08037, arXiv.org.
    4. Paskalis Glabadanidis & Leon Zolotoy, 2013. "Benchmark replication portfolio strategies," Journal of Asset Management, Palgrave Macmillan, vol. 14(2), pages 95-110, April.

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