Dynamic Index Tracking and Risk Exposure Control Using Derivatives

Lecture / Panel
Open to the Public

Event poster

You are cordially invited to attend the upcoming FRE Lecture on Thursday, April 18th at 6PM in the Event MakerSpace. Dr. Tim Leung will present a talk on the following topic:


Dynamic Index Tracking and Risk Exposure Control Using Derivatives


A common challenge faced by many institutional and retail investors is to effectively control risk exposure to various market factors. There is a great variety of indices designed to provide different types of exposures across sectors and asset classes. Some of these indices can be difficult or impossible to trade directly, but investors can trade the associated financial derivatives if they are available in the market. For example, the CBOE Volatility Index (VIX), often referred to as the fear index, is not directly tradable, but investors can gain exposure to the index and potentially hedge against market turmoil by trading futures and options written on VIX.

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. A general tracking condition is established to relate the portfolio drift to the desired exposure coefficients under any given model. We derive the 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. Trading strategies are implemented under a number of models using different derivatives, such as futures and options.


Tim Leung is an Associate Professor in the Department of Applied Mathematics and the Director of the UW Computational Finance & Risk Management (CFRM) program. Previously, he was an Assistant Professor at Johns Hopkins University and Columbia University. He obtained his BS from Cornell University and PhD from Princeton University. His research areas are Quantitative Finance and Optimal Stochastic Control. He has worked on a variety of problems, such as portfolio optimization, algorithmic trading, exchange-traded funds (ETFs), and commodities. His research has been funded by the National Science Foundation (NSF), and published in dozens of peer-reviewed articles and two books. Professor Leung is the Chair for the Institute for Operations Research and the Management Sciences (INFORMS) Finance Section, as well as Vice Chair for the SIAM Activity Group on Financial Mathematics & Engineering (SIAG-FME). He is the founding editor of a book series called Modern Trends in Financial Engineering, and also an Associate Editor of a number of journals in Financial Math and Engineering.

We look forward to having you join us on Thursday, April 18th for the talk and refreshments. See attached poster for more details. Please mark your calendars.

Also, if you are interested in attending the free Quantitative Finance Weekly Seminars, please see the link below: