PT  - JOURNAL ARTICLE
AU  - Walter Sun
AU  - Ayres Fan
AU  - Li-Wei Chen
AU  - Tom Schouwenaars
AU  - Marius A. Albota
TI  - Optimal Rebalancing for Institutional Portfolios
AID  - 10.3905/jpm.2006.611801
DP  - 2006 Jan 31
TA  - The Journal of Portfolio Management
PG  - 33--43
VI  - 32
IP  - 2
4099  - https://pm-research.com/content/32/2/33.short
4100  - https://pm-research.com/content/32/2/33.full
AB  - Institutional fund managers generally rebalance using ad hoc methods such as calendar periods or tolerance band triggers. Another approach is to quantify the cost of a rebalancing strategy in terms of risk-adjusted returns net of transaction costs. An optimal rebalancing strategy that actively seeks to minimize that cost uses certainty-equivalents and the transaction costs associated with a policy to define a cost-to-go function. Stochastic programming is then used to minimize expected cost-to-go. Monte Carlo simulations demonstrate that the method outperforms traditional rebalancing strategies such as periodic and 5% tolerance rebalancing.TOPICS: Mutual funds/passive investing/indexing, quantitative methods, simulations