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Analysis of the rebalancing frequency in log-optimal portfolio selection


Kuhn, Daniel; Luenberger, David G.


Bitte beziehen Sie sich beim Zitieren dieses Dokumentes immer auf folgenden Persistent Identifier (PID):http://nbn-resolving.de/urn:nbn:de:0168-ssoar-221449

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Abstract In a dynamic investment situation, the right timing of portfolio revisions and adjustments is essential to sustain long-term growth. A high rebalancing frequency reduces the portfolio performance in the presence of transaction costs, whereas a low rebalancing frequency entails a static investment strategy that hardly reacts to changing market conditions. This article studies a family of portfolio problems in a Black-Scholes type economy which depend parametrically on the rebalancing frequency. As an objective criterion we use log-utility, which has strong theoretical appeal and represents a natural choice if the primary goal is long-term performance. We argue that continuous rebalancing only slightly outperforms discrete rebalancing if there are no transaction costs and if the rebalancing intervals are shorter than about one year. Our analysis also reveals that diversification has a dual effect on the mean and variance of the portfolio growth rate as well as on their sensitivities with respect to the rebalancing frequency.
Klassifikation Finanzwirtschaft, Rechnungswesen; Wirtschaftsstatistik, Ökonometrie, Wirtschaftsinformatik
Methode Theorieanwendung
Sprache Dokument Englisch
Publikationsjahr 2010
Seitenangabe S. 221-234
Zeitschriftentitel Quantitative Finance, 10 (2010) 2
DOI http://dx.doi.org/10.1080/14697680802629400
Status Postprint; begutachtet (peer reviewed)
Lizenz PEER Licence Agreement (applicable only to documents from PEER project)