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Dynamic Portfolio Choice with Linear Rebalancing Rules

Author

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  • Moallemi, Ciamac C.
  • Sağlam, Mehmet

Abstract

We consider a broad class of dynamic portfolio optimization problems that allow for complex models of return predictability, transaction costs, trading constraints, and risk considerations. Determining an optimal policy in this general setting is almost always intractable. We propose a class of linear rebalancing rules and describe an efficient computational procedure to optimize with this class. We illustrate this method in the context of portfolio execution and show that it achieves near optimal performance. We consider another numerical example involving dynamic trading with mean-variance preferences and demonstrate that our method can result in economically large benefits.

Suggested Citation

  • Moallemi, Ciamac C. & Sağlam, Mehmet, 2017. "Dynamic Portfolio Choice with Linear Rebalancing Rules," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(3), pages 1247-1278, June.
    • Handle: RePEc:cup:jfinqa:v:52:y:2017:i:03:p:1247-1278_00
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    Citations

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    Cited by:

    1. Mei, Xiaoling & Nogales, Francisco J., 2018. "Portfolio selection with proportional transaction costs and predictability," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 131-151.
    2. Yoshiyuki Shimai & Naoki Makimoto, 2023. "Multi-period Dynamic Bond Portfolio Optimization Utilizing a Stochastic Interest Rate Model," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(4), pages 817-844, December.
    3. Takano, Yuichi & Gotoh, Jun-ya, 2023. "Dynamic portfolio selection with linear control policies for coherent risk minimization," Operations Research Perspectives, Elsevier, vol. 10(C).
    4. Yaoting Lei & Ya Li & Jing Xu, 2020. "Two Birds, One Stone: Joint Timing of Returns and Capital Gains Taxes," Management Science, INFORMS, vol. 66(2), pages 823-843, February.
    5. Alain Bensoussan & Guiyuan Ma & Chi Chung Siu & Sheung Chi Phillip Yam, 2022. "Dynamic mean–variance problem with frictions," Finance and Stochastics, Springer, vol. 26(2), pages 267-300, April.
    6. Ma, Guiyuan & Siu, Chi Chung & Zhu, Song-Ping, 2019. "Dynamic portfolio choice with return predictability and transaction costs," European Journal of Operational Research, Elsevier, vol. 278(3), pages 976-988.
    7. Yan, Tingjin & Han, Jinhui & Ma, Guiyuan & Siu, Chi Chung, 2023. "Dynamic asset-liability management with frictions," Insurance: Mathematics and Economics, Elsevier, vol. 111(C), pages 57-83.
    8. Ma, Guiyuan & Siu, Chi Chung & Zhu, Song-Ping, 2020. "Optimal investment and consumption with return predictability and execution costs," Economic Modelling, Elsevier, vol. 88(C), pages 408-419.
    9. Ma, Guiyuan & Siu, Chi Chung & Zhu, Song-Ping, 2022. "Portfolio choice with return predictability and small trading frictions," Economic Modelling, Elsevier, vol. 111(C).
    10. Panos Xidonas & Mike Tsionas & Constantin Zopounidis, 2020. "On mutual funds-of-ETFs asset allocation with rebalancing: sample covariance versus EWMA and GARCH," Annals of Operations Research, Springer, vol. 284(1), pages 469-482, January.
    11. Puru Gupta & Saul D. Jacka, 2023. "Portfolio Choice In Dynamic Thin Markets: Merton Meets Cournot," Papers 2309.16047, arXiv.org.
    12. Yao, Haixiang & Huang, Jinbo & Li, Yong & Humphrey, Jacquelyn E., 2021. "A general approach to smooth and convex portfolio optimization using lower partial moments," Journal of Banking & Finance, Elsevier, vol. 129(C).
    13. Gerry Tsoukalas & Jiang Wang & Kay Giesecke, 2019. "Dynamic Portfolio Execution," Management Science, INFORMS, vol. 67(5), pages 2015-2040, May.
    14. Yao, Haixiang & Li, Danping & Wu, Huiling, 2022. "Dynamic trading with uncertain exit time and transaction costs in a general Markov market," International Review of Financial Analysis, Elsevier, vol. 84(C).

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