Portfolio Optimisation and Endogenous Rebalancing Methods

Guilherme Demos, Thomas Pires () and Guilherme Moura ()
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Thomas Pires: UFSC

Brazilian Review of Finance, 2015, vol. 13, issue 4, 544-570

Abstract: Investment managers often rebalance portfolios using it ad-hoc criteria due the trade-off between gains from updating optimal weight and costs incurred from changing the portfolio composition. A common solution for this stalemate is rebalancing the portfolio based on some exogenous criteria. By monitoring the optimal weights of the portfolio through control charts, the authors propose a portfolio rebalance strategy based solely on endogenous information. The optimal portfolio weights are thus monitored daily and if statistical significant changes are detected we either rebalance or not the portfolio thus avoiding transaction costs. The performance of the rebalancing strategy is then compared with different periodical strategies based on indicators such as Turnover and Sharpe-Ratio. Our results suggest that rebalancing strategies based on signals from control charts outperform those based solely on exogenous criteria, thus yielding economical gains to the investor.

Keywords: Global Minimum Variance Portfolio; Statistical Processes Control; Control Charts (search for similar items in EconPapers)
JEL-codes: C53 E43 G17 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:13:y:2015:i:4:p:544-570

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