Testing Rebalancing Strategies for Stock-Bond Portfolios: Where Is the Value Added of Rebalancing?

Abstract

We apply a stationary bootstrap approach that enables us to test the value added of rebalancing for stock-bond portfolios using historical data from the United States, the United Kingdom, and Germany. Analyzing the Sharpe ratio, the Omega measure, and the Sortino ratio as simple measures of value added, our historical simulation results provide strong evidence that all rebalancing strategies significantly outperform a buy-and-hold strategy. This outperformance is attributable to reduced risk, while there are no statistical differences in returns between rebalancing and buy-and-hold. Therefore, we conclude that it is a risk management argument, which justifies the widespread use of rebalancing in investment practice: The primary objective of any rebalancing strategy is the reduction of risk relative to a given asset allocation.

Keywords: rebalancing, bootstrap, performance measurement, statistical inference, stock-bond portfolio

JEL Classification: G11