Incorporating Linear Neutrality Constraints into the Garleanu-Pedersen Framework for Dynamic Trading
9 Pages Posted: 18 May 2021 Last revised: 30 May 2021
Date Written: May 17, 2021
In an elegant and influential paper, Garleanu and Pedersen derive the optimal dynamic trading policy assuming quadratic transaction costs and assets with predictable, mean-reverting returns. We show that their approach can be extended to incorporate linear neutrality constraints, such as dollar and beta neutrality, which are of practical interest. The solutions remain analytically tractable and are closely related to those of the unconstrained policy.
Keywords: Portfolio optimization, Constrained optimization, Multiperiod optimization, Dynamic trading, Transaction cost
JEL Classification: G11
Suggested Citation: Suggested Citation