Dynamic index tracking and risk exposure control using derivatives

DOI10.1080/1350486X.2018.1507750zbMATH Open1418.91522arXiv1705.10454WikidataQ129361049 ScholiaQ129361049MaRDI QIDQ4559474FDOQ4559474

Authors: Tim Leung, Brian Ward 

Publication date: 3 December 2018

Published in: Applied Mathematical Finance (Search for Journal in Brave)

Abstract: We develop a methodology for index tracking and risk exposure control using financial derivatives. Under a continuous-time diffusion framework for price evolution, we present a pathwise approach to construct dynamic portfolios of derivatives in order to gain exposure to an index and/or market factors that may be not directly tradable. Among our results, we establish a general tracking condition that relates the portfolio drift to the desired exposure coefficients under any given model. We also derive a slippage process that reveals how the portfolio return deviates from the targeted return. In our multi-factor setting, the portfolio's realized slippage depends not only on the realized variance of the index, but also the realized covariance among the index and factors. We implement our trading strategies under a number of models, and compare the tracking strategies and performances when using different derivatives, such as futures and options.

Full work available at URL: https://arxiv.org/abs/1705.10454

Recommendations

• A method for robust index tracking
• scientific article; zbMATH DE number 1313345
• Index tracking with fixed and variable transaction costs
• Hedging diffusion processes by local risk minimization with applications to index tracking
• Mean-risk optimization for index tracking

zbMATH Keywords

index trackingrealized covarianceslippagederivatives tradingexposure control

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Portfolio theory (91G10)

Cites Work

• The pricing of options and corporate liabilities
• Two singular diffusion problems
• A theory of the term structure of interest rates
• A closed-form solution for options with stochastic volatility with applications to bond and currency options
• A YIELD‐FACTOR MODEL OF INTEREST RATES
• Tracking a Financial Benchmark Using a Few Assets
• Path-dependence of leveraged ETF returns
• A stochastic receding horizon control approach to constrained index tracking
• Implied volatility of leveraged ETF options
• Equity index replication with standard and robust regression estimators
• Leveraged ETF implied volatilities from ETF dynamics
• Leveraged exchange-traded funds. Price dynamics and options valuation

Cited In (4)

• Risk-allocation-based index tracking
• Hedging Option Books Using Neural-SDE Market Models
• VIX versus VXX: a joint analytical framework
• Constrained dynamic futures portfolios with stochastic basis

This page was built for publication: Dynamic index tracking and risk exposure control using derivatives

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q4559474)