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Rebalancing versus buy and hold: theory, simulation and empirical analysis

Author

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  • Jimmy E. Hilliard

    (Auburn University)

  • Jitka Hilliard

    (Auburn University)

Abstract

We consider returns from rebalanced and buy and hold portfolios consisting of the same stocks. Theoretical properties are derived using Jensen’s inequality and the Hölder’s Defect Formula. Simulations are used to confirm theory and to investigate ambiguous cases where theory is silent. Rebalancing decreases total return volatility, while buy and hold produces greater expected return. Results are more opaque with respect to Sharpe Ratios and expected geometric means. Our empirical tests are based on portfolios composed of the risk-free asset, CRSP market value returns and returns from five Fama–French industries. While rebalancing reduces volatility and momentum effect, our tests largely favor the buy and hold strategy due to the high relative returns enjoyed by stocks vis-a-vis the risk-free asset. Transactions cost for rebalancing the portfolio are economically negligible.

Suggested Citation

  • Jimmy E. Hilliard & Jitka Hilliard, 2018. "Rebalancing versus buy and hold: theory, simulation and empirical analysis," Review of Quantitative Finance and Accounting, Springer, vol. 50(1), pages 1-32, January.
    • Handle: RePEc:kap:rqfnac:v:50:y:2018:i:1:d:10.1007_s11156-017-0621-5
    DOI: 10.1007/s11156-017-0621-5
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    Cited by:

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    2. Levy, Moshe, 2024. "Does constant asset allocation dominate buy-and-hold?," Finance Research Letters, Elsevier, vol. 62(PB).
    3. Rim Bernoussi & Michael Rockinger, 2023. "Rebalancing with transaction costs: theory, simulations, and actual data," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 37(2), pages 121-160, June.
    4. Jaydip Sen & Arup Dasgupta & Subhasis Dasgupta & Sayantani Roychoudhury, 2023. "A Portfolio Rebalancing Approach for the Indian Stock Market," Papers 2310.09770, arXiv.org.
    5. Tai Vo-Van & Ha Che-Ngoc & Nghiep Le-Dai & Thao Nguyen-Trang, 2022. "A New Strategy for Short-Term Stock Investment Using Bayesian Approach," Computational Economics, Springer;Society for Computational Economics, vol. 59(2), pages 887-911, February.

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    More about this item

    Keywords

    Portfolio choice; Rebalancing; Buy and hold; Geometric mean; Transaction costs;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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