Rebalancing versus buy and hold: theory, simulation and empirical analysis

Jimmy E. Hilliard () and Jitka Hilliard ()
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Jimmy E. Hilliard: Auburn University
Jitka Hilliard: Auburn University

Review of Quantitative Finance and Accounting, 2018, vol. 50, issue 1, No 1, 32 pages

Abstract: Abstract We consider returns from rebalanced and buy and hold portfolios consisting of the same stocks. Theoretical properties are derived using Jensen’s inequality and the Hölder’s Defect Formula. Simulations are used to confirm theory and to investigate ambiguous cases where theory is silent. Rebalancing decreases total return volatility, while buy and hold produces greater expected return. Results are more opaque with respect to Sharpe Ratios and expected geometric means. Our empirical tests are based on portfolios composed of the risk-free asset, CRSP market value returns and returns from five Fama–French industries. While rebalancing reduces volatility and momentum effect, our tests largely favor the buy and hold strategy due to the high relative returns enjoyed by stocks vis-a-vis the risk-free asset. Transactions cost for rebalancing the portfolio are economically negligible.

Keywords: Portfolio choice; Rebalancing; Buy and hold; Geometric mean; Transaction costs (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s11156-017-0621-5

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