59 Pages Posted: 27 Feb 2012 Last revised: 26 Mar 2015
Date Written: March 25, 2015
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.
Keywords: Portfolio Choice, Transaction Costs, Return Predictability, Portfolio Execution
JEL Classification: G11
Suggested Citation: Suggested Citation
Moallemi, Ciamac C. and Sağlam, Mehmet, Dynamic Portfolio Choice with Linear Rebalancing Rules (March 25, 2015). Available at SSRN: https://ssrn.com/abstract=2011605 or http://dx.doi.org/10.2139/ssrn.2011605
By Jim Gatheral