Minimum deviation enhanced portfolio replication with expectiles

This work addresses the problem of enhanced portfolio replication, proposing a strategy based on the minimization of a novel deviation strategies based on expectiles. This measure allows to account asymmetrically for the differences between the portfolio and the benchmark, favouring positive deviations compared to negative ones. We show that the model nests the minimum TEV replication scheme. The empirical applications focuses on the Standard and Poor’s 100 index, for which we create replicating portfolios with a positive expected excess return. The results show that the replication scheme proposed here allows to overperform the benchmark out-of-sample, and that portfolios with < . allow to reduce the lower tail risk measured in terms of CVAR compared to the minimum TEV portfolio. The resulting portfolios show a sufficient level of diversification, and a controlled turnover.