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

Abstract

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

Kamal, Michael, Incorporating Linear Neutrality Constraints into the Garleanu-Pedersen Framework for Dynamic Trading (May 17, 2021). Available at SSRN: https://ssrn.com/abstract=3848019 or http://dx.doi.org/10.2139/ssrn.3848019

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