A comparison of static and dynamic portfolio policies
A comparison of static and dynamic portfolio policies
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.
111-127
Wang, Jianshen
5441624e-4585-4779-8ee2-9c9533451173
Taylor, Nick
1908969c-f029-4758-829a-e48650ff574c
January 2018
Wang, Jianshen
5441624e-4585-4779-8ee2-9c9533451173
Taylor, Nick
1908969c-f029-4758-829a-e48650ff574c
Wang, Jianshen and Taylor, Nick
(2018)
A comparison of static and dynamic portfolio policies.
International Review of Financial Analysis, 55, .
(doi:10.1016/j.irfa.2017.09.007).
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.
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Accepted/In Press date: 14 September 2017
e-pub ahead of print date: 16 November 2017
Published date: January 2018
Identifiers
Local EPrints ID: 418224
URI: http://eprints.soton.ac.uk/id/eprint/418224
ISSN: 1057-5219
PURE UUID: 33f7f80f-12a9-4924-999d-b5539e6117ef
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Date deposited: 23 Feb 2018 17:30
Last modified: 15 Mar 2024 17:38
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Author:
Jianshen Wang
Author:
Nick Taylor
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