RT Journal Article
SR Electronic
T1 Optimal Rebalancing for Institutional Portfolios
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 33
OP 43
DO 10.3905/jpm.2006.611801
VO 32
IS 2
A1 Sun, Walter
A1 Fan, Ayres
A1 Chen, Li-Wei
A1 Schouwenaars, Tom
A1 Albota, Marius A.
YR 2006
UL http://jpm.pm-research.com/content/32/2/33.abstract
AB Institutional fund managers generally rebalance using ad hoc methods such as calendar periods or tolerance band triggers. Another approach is to quantify the cost of a rebalancing strategy in terms of risk-adjusted returns net of transaction costs. An optimal rebalancing strategy that actively seeks to minimize that cost uses certainty-equivalents and the transaction costs associated with a policy to define a cost-to-go function. Stochastic programming is then used to minimize expected cost-to-go. Monte Carlo simulations demonstrate that the method outperforms traditional rebalancing strategies such as periodic and 5% tolerance rebalancing.