EconPapers    
Economics at your fingertips  
 

Dynamic Trading with Predictable Returns and Transaction Costs

Nicolae Bogdan Garleanu and Lasse Pedersen

No 7392, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper derives in closed form the optimal dynamic portfolio policy when trading is costly and security returns are predictable by signals with different mean-reversion speeds. The optimal updated portfolio is a linear combination of the existing portfolio, the optimal portfolio absent trading costs, and the optimal portfolio based on future expected returns and transaction costs. Predictors with slower mean reversion (alpha decay) get more weight since they lead to a favorable positioning both now and in the future. We implement the optimal policy for commodity futures and show that the resulting portfolio has superior returns net of trading costs relative to more naive benchmarks. Finally, we derive natural equilibrium implications, including that demand shocks with faster mean reversion command a higher return premium.

Keywords: dynamic trading; portfolio choice; predictability; transaction costs (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mst
Date: 2009-08
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (5) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=7392 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Dynamic Trading with Predictable Returns and Transaction Costs (2013) Downloads
Working Paper: Dynamic Trading with Predictable Returns and Transaction Costs (2009) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:7392

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=7392

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ..
Bibliographic data for series maintained by (). This e-mail address is bad, please contact .

 
Page updated 2018-06-21
Handle: RePEc:cpr:ceprdp:7392