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Tracking error: ex-ante versus ex-post measures

By Soosung Hwang and S. (Stephen) Satchell

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

Topics: HB, HD61
Publisher: Warwick Business School, Financial Econometrics Research Centre
Year: 2001
OAI identifier: oai:wrap.warwick.ac.uk:1813

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