Transaction fees and optimal rebalancing in the growth-optimal portfolio

Yu Feng, Matúš Medo, Liang Zhang and Yi-Cheng Zhang

Physica A: Statistical Mechanics and its Applications, 2011, vol. 390, issue 9, 1635-1645

Abstract: The growth-optimal portfolio optimization strategy pioneered by Kelly is based on constant portfolio rebalancing which makes it sensitive to transaction fees. We examine the effect of fees on an example of a risky asset with a binary return distribution and show that the fees may give rise to an optimal period of portfolio rebalancing. The optimal period is found analytically in the case of lognormal returns. This result is consequently generalized and numerically verified for broad return distributions and returns generated by a GARCH process. Finally we study the case when investment is rebalanced only partially and show that this strategy can improve the investment long-term growth rate more than optimization of the rebalancing period.

Keywords: Growth-optimal portfolio; Kelly game; Transaction fees; Lognormal distribution (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:390:y:2011:i:9:p:1635-1645

DOI: 10.1016/j.physa.2010.12.031

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