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Disentangling rebalancing return

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  • Winfried G Hallerbach

    (Quantitative Strategies, Robeco Investment Management)

Abstract

The use of portfolio rebalancing as a profitable strategy (or ‘volatility harvesting’) is a hot topic. Indeed, it is interesting to know what the impact of periodic rebalancing is on the growth rate of a portfolio. Unfortunately, the terminology used in the literature is confusing. Terms such as ‘diversification return’ and ‘rebalancing return’ are used interchangeably to indicate the growth rate that a rebalanced portfolio can earn in excess of a buy-and-hold portfolio. The literature is also confused in specifying this excess growth rate from rebalancing. In this article, we investigate the full return from rebalancing and decompose it into the volatility return and the dispersion discount. We prove some general results regarding these components and present some simple approximations that provide direct insight into the driving forces behind these building blocks. We consider a pro forma US asset portfolio over the period 1974–2013, which allows us to investigate the relative magnitude of the discussed effects and their time variation.

Suggested Citation

  • Winfried G Hallerbach, 2014. "Disentangling rebalancing return," Journal of Asset Management, Palgrave Macmillan, vol. 15(5), pages 301-316, October.
    • Handle: RePEc:pal:assmgt:v:15:y:2014:i:5:d:10.1057_jam.2014.29
    DOI: 10.1057/jam.2014.29
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    References listed on IDEAS

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    1. repec:bla:jfinan:v:44:y:1989:i:5:p:1435-38 is not listed on IDEAS
    2. Ang, Andrew, 2014. "Asset Management: A Systematic Approach to Factor Investing," OUP Catalogue, Oxford University Press, number 9780199959327.
    3. Hubert Dichtl & Wolfgang Drobetz & Martin Wambach, 2014. "Where is the value added of rebalancing? A systematic comparison of alternative rebalancing strategies," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 28(3), pages 209-231, August.
    4. Scott Willenbrock, 2011. "Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle," Papers 1109.1256, arXiv.org.
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    Cited by:

    1. Vafai, Nima & Rakowski, David, 2024. "The sources of portfolio volatility and mutual fund performance," International Review of Financial Analysis, Elsevier, vol. 91(C).
    2. Frieder Meyer-Bullerdiek, 2017. "Rebalancing and Diversification Return – Evidence from the German Stock Market," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 6(2), pages 1-1.
    3. Frieder Meyer-Bullerdiek, 2018. "Portfolio rebalancing versus buy-and-hold: A simulation based study with special consideration of portfolio concentration," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(5), pages 1-4.
    4. Ravi Kashyap, 2024. "To Trade Or Not To Trade: Cascading Waterfall Round Robin Rebalancing Mechanism for Cryptocurrencies," Papers 2407.12150, arXiv.org.
    5. Keith Cuthbertson & Simon Hayley & Nick Motson & Dirk Nitzsche, 2016. "What Does Rebalancing Really Achieve?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(3), pages 224-240, July.
    6. Soumik Pal & Ting-Kam Leonard Wong, 2016. "Exponentially concave functions and a new information geometry," Papers 1605.05819, arXiv.org, revised May 2017.
    7. Mantilla-Garcia, Daniel & Malagon, Juliana & Aldana-Galindo, Julian R., 2022. "Can the portfolio excess growth rate explain the predictive power of idiosyncratic volatility?," Finance Research Letters, Elsevier, vol. 47(PA).

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