Investors usually assign part of their funds to asset managers, who are given the task of beating... more Investors usually assign part of their funds to asset managers, who are given the task of beating a benchmark. Asset managers usually face a constraint on maximum tracking error volatility (TEV), which is imposed by the risk management office. In the mean-variance space, Jorion, in his 2003 paper "Portfolio optimization with tracking-error constraints", shows that this constraint determines an ellipse containing all admissible portfolios. However, many admissible portfolios have problems in mean-variance terms, for example, because of an overly high variance. To overcome this problem, Jorion also fixes a constraint on variance, while, in their 2008 paper "Active portfolio management with benchmarking: adding a value-at-risk constraint", Alexander and Baptista fix a constraint on value-at-risk (VaR). In this paper, I determine an optimal value for a set of limits composed of the lower limit on TEV, the upper limit on TEV and the upper limit on VaR. To fix the upper limit on VaR, I use the TEV constrained efficient frontier developed in Palomba and Riccetti's 2013 paper "Asset management with TEV and VAR constraints: the constrained efficient frontiers", which is the set of portfolios that is on Jorion's ellipse and not dominated from the mean-variance perspective. In particular, I develop a strategy to impose on asset managers a set of portfolios that contains as many TEV constrained efficient portfolios and as few inefficient portfolios as possible. Moreover, I show that a limit on maximum VaR is usually better than a limit on maximum variance
ABSTRACT The risk management department usually imposes to asset managers a maximum value of the ... more ABSTRACT The risk management department usually imposes to asset managers a maximum value of the tracking error volatility (TEV), but it does not establish a rule on TEV to understand whether portfolio managers are active. Analytical methods are derived to understand whether the asset allocation is active allowing to have an excess return above the benchmark large enough to cover the commission paid by investors and, concurrently, allowing to restrict the variance of the portfolio to be no more than the benchmark's variance, in order to avoid an excess return merely due to a higher risk level. These equations are a necessary (but not sufficient) condition to beat the benchmark's return, without increasing the overall variance of the portfolio. This is also a generalisation of the Jorion (2003) model with the use of commissions. These equations are applied to a liquidity fund and the fees are found to be too high.
In Riccetti (2010) I find that the use of copulas can be useful in an asset allocation model for ... more In Riccetti (2010) I find that the use of copulas can be useful in an asset allocation model for choosing the stock and the bond composition of portfolios (the macro asset allocation) or if the portfolio is composed by one bond index and some stock indices. Thus, in these cases, easy methods to reconstruct the copula allocation without estimating the
Investors assign part of their funds to asset managers that are given the task of beating a bench... more Investors assign part of their funds to asset managers that are given the task of beating a benchmark. The risk management department usually imposes a maximum value of the tracking error volatility (TEV) in order to keep the risk of the portfolio near to that of the selected benchmark. However, risk management does not establish a rule on TEV which
Many authors have suggested that the mean-variance criterion, conceived by Markowitz (1952), is n... more Many authors have suggested that the mean-variance criterion, conceived by Markowitz (1952), is not optimal for asset allocation, because the investor expected utility function is better proxied by a function that uses higher moments and because returns are distributed in a non-Normal way, being asymmetric and/or leptokurtic, so the mean-variance criterion can not correctly proxy the expected utility with non-Normal
ABSTRACT We investigate the interplay between increasing inequality and consumer credit in a comp... more ABSTRACT We investigate the interplay between increasing inequality and consumer credit in a complex macroeconomic system with financially fragile heterogeneous households, firms and banks. Simulation results show that there are pros and cons of introducing consumer credit: on the one hand, for a certain time, it leads to lower unemployment through boosting aggregate demand; on the other hand, it accelerates the system tendency to the crisis. Since the increase of financial profits goes with a decline of households’ real wealth, a policy trade-off emerges.
Advances in Intelligent Systems and Computing, 2014
ABSTRACT Our aim is to analyse the interplay between growing inequality and financial fragility i... more ABSTRACT Our aim is to analyse the interplay between growing inequality and financial fragility in a complex macroeconomic system. In order to do this, we propose a macroeconomic microfounded framework with heterogeneous agents in which households, firms, and banks interact according to decentralised matching processes. The main result is that growing inequality leads to more macroeconomic volatility, increasing the likelihood of observing large unemployment crises.
... Luca RICCETTI () (Universit Politecnica delle Marche, Dipartimento di Scienze Economiche e S... more ... Luca RICCETTI () (Universit Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali ... di Scienze Economiche e Sociali) Mauro GALLEGATI () (Universit Politecnica delle Marche, Dipartimento di ... In case of default, we also consider the loss given default rate ...
Investors usually assign part of their funds to asset managers, who are given the task of beating... more Investors usually assign part of their funds to asset managers, who are given the task of beating a benchmark. Asset managers usually face a constraint on maximum tracking error volatility (TEV), which is imposed by the risk management office. In the mean-variance space, Jorion, in his 2003 paper "Portfolio optimization with tracking-error constraints", shows that this constraint determines an ellipse containing all admissible portfolios. However, many admissible portfolios have problems in mean-variance terms, for example, because of an overly high variance. To overcome this problem, Jorion also fixes a constraint on variance, while, in their 2008 paper "Active portfolio management with benchmarking: adding a value-at-risk constraint", Alexander and Baptista fix a constraint on value-at-risk (VaR). In this paper, I determine an optimal value for a set of limits composed of the lower limit on TEV, the upper limit on TEV and the upper limit on VaR. To fix the upper limit on VaR, I use the TEV constrained efficient frontier developed in Palomba and Riccetti's 2013 paper "Asset management with TEV and VAR constraints: the constrained efficient frontiers", which is the set of portfolios that is on Jorion's ellipse and not dominated from the mean-variance perspective. In particular, I develop a strategy to impose on asset managers a set of portfolios that contains as many TEV constrained efficient portfolios and as few inefficient portfolios as possible. Moreover, I show that a limit on maximum VaR is usually better than a limit on maximum variance
ABSTRACT The risk management department usually imposes to asset managers a maximum value of the ... more ABSTRACT The risk management department usually imposes to asset managers a maximum value of the tracking error volatility (TEV), but it does not establish a rule on TEV to understand whether portfolio managers are active. Analytical methods are derived to understand whether the asset allocation is active allowing to have an excess return above the benchmark large enough to cover the commission paid by investors and, concurrently, allowing to restrict the variance of the portfolio to be no more than the benchmark's variance, in order to avoid an excess return merely due to a higher risk level. These equations are a necessary (but not sufficient) condition to beat the benchmark's return, without increasing the overall variance of the portfolio. This is also a generalisation of the Jorion (2003) model with the use of commissions. These equations are applied to a liquidity fund and the fees are found to be too high.
In Riccetti (2010) I find that the use of copulas can be useful in an asset allocation model for ... more In Riccetti (2010) I find that the use of copulas can be useful in an asset allocation model for choosing the stock and the bond composition of portfolios (the macro asset allocation) or if the portfolio is composed by one bond index and some stock indices. Thus, in these cases, easy methods to reconstruct the copula allocation without estimating the
Investors assign part of their funds to asset managers that are given the task of beating a bench... more Investors assign part of their funds to asset managers that are given the task of beating a benchmark. The risk management department usually imposes a maximum value of the tracking error volatility (TEV) in order to keep the risk of the portfolio near to that of the selected benchmark. However, risk management does not establish a rule on TEV which
Many authors have suggested that the mean-variance criterion, conceived by Markowitz (1952), is n... more Many authors have suggested that the mean-variance criterion, conceived by Markowitz (1952), is not optimal for asset allocation, because the investor expected utility function is better proxied by a function that uses higher moments and because returns are distributed in a non-Normal way, being asymmetric and/or leptokurtic, so the mean-variance criterion can not correctly proxy the expected utility with non-Normal
ABSTRACT We investigate the interplay between increasing inequality and consumer credit in a comp... more ABSTRACT We investigate the interplay between increasing inequality and consumer credit in a complex macroeconomic system with financially fragile heterogeneous households, firms and banks. Simulation results show that there are pros and cons of introducing consumer credit: on the one hand, for a certain time, it leads to lower unemployment through boosting aggregate demand; on the other hand, it accelerates the system tendency to the crisis. Since the increase of financial profits goes with a decline of households’ real wealth, a policy trade-off emerges.
Advances in Intelligent Systems and Computing, 2014
ABSTRACT Our aim is to analyse the interplay between growing inequality and financial fragility i... more ABSTRACT Our aim is to analyse the interplay between growing inequality and financial fragility in a complex macroeconomic system. In order to do this, we propose a macroeconomic microfounded framework with heterogeneous agents in which households, firms, and banks interact according to decentralised matching processes. The main result is that growing inequality leads to more macroeconomic volatility, increasing the likelihood of observing large unemployment crises.
... Luca RICCETTI () (Universit Politecnica delle Marche, Dipartimento di Scienze Economiche e S... more ... Luca RICCETTI () (Universit Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali ... di Scienze Economiche e Sociali) Mauro GALLEGATI () (Universit Politecnica delle Marche, Dipartimento di ... In case of default, we also consider the loss given default rate ...
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