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Dynamic Portfolio Choice with Linear Rebalancing Rules

59 Pages Posted: 27 Feb 2012 Last revised: 26 Mar 2015

Ciamac C. Moallemi

Columbia Business School - Decision Risk and Operations

Mehmet Sağlam

University of Cincinnati - Department of Finance - Real Estate

Date Written: March 25, 2015

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.

Keywords: Portfolio Choice, Transaction Costs, Return Predictability, Portfolio Execution

JEL Classification: G11

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

Ciamac C. Moallemi

Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

HOME PAGE: http://moallemi.com/ciamac

Mehmet Sağlam (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

Carl H. Lindner College of Business
Cincinnati, OH 45221
United States
(513) 556-9108 (Phone)

HOME PAGE: http://homepages.uc.edu/~saglammt/

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