Dynamic index tracking and risk exposure control using derivatives

DOI10.1080/1350486X.2018.1507750MaRDI QIDQ4559474zbMATH OpenWikidataFDO

Authors Tim Leung, Brian Ward

Publication date 3 December 2018

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

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

zbMATH Keywords

index trackingrealized covarianceslippagederivatives tradingexposure control

Mathematics Subject Classification ID

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

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.

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Cites work

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Cited in

(4)

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

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