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A comparison of static and dynamic portfolio policies

Research output: Contribution to journalArticle

Original languageEnglish
Pages (from-to)111-127
Number of pages17
JournalInternational Review of Financial Analysis
Volume55
Early online date16 Nov 2017
DOIs
DateAccepted/In press - 14 Sep 2017
DateE-pub ahead of print - 16 Nov 2017
DatePublished (current) - 1 Jan 2018

Abstract

Garleanu and Pedersen (2013) show that the optimal static portfolio policy in light of quadratic transaction costs is a weighted average of the existing portfolio and the target portfolio. In this paper, we demonstrate the importance of the robust target portfolio in the static portfolio policy that considers quadratic transaction costs. By using both empirical and simulated data, we find no evidence that the optimal dynamic portfolio policy proposed by Garleanu and Pedersen (2013) is superior to the static portfolio policy that trades towards the robust target portfolio. The robust target portfolio is achieved by either introducing time-varying covariances or restricting portfolio weights. Furthermore, the static portfolio with time-varying covariances and the short sale-constrained static portfolio are both very efficient in reducing portfolio turnover. The good performance of the static portfolio policy is robust to parameter uncertainty and trading parameters.

    Research areas

  • Dynamic/static portfolio policy, Time-varying covariances, Transaction costs

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  • Full-text PDF (accepted author manuscript)

    Rights statement: This is the author accepted manuscript (AAM). The final published version (version of record) is available online via Elsevier at http://www.sciencedirect.com/science/article/pii/S1057521917301084 . Please refer to any applicable terms of use of the publisher.

    Accepted author manuscript, 766 KB, PDF document

    Licence: CC BY-NC-ND

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