EconPapers    
Economics at your fingertips  
 

Optimal Cash Management for Investment Funds

Hayne Leland and Gregory Connor.
Authors registered in the RePEc Author Service: Gregory Connor () and Hayne Ellis Leland

No RPF-244, Research Program in Finance Working Papers from University of California at Berkeley

Abstract: We consider the question of how much cash should be held by an investment fund for transactions purposes. Cash is needed to meet redemptions and rights offerings; it is generated by dividends and contributions. It is assumed the cumulative cash flow follows a random walk, perhaps with a drift. If transactions costs were zero, it would be optimal to keep zero cash balances, since cash reduces expected return and adds to tracking error. But keeping cash balances at zero would be very expensive in the presence of transactions costs, since random walks have infinite variation. The optimal cash policy requires a no trade interval [*]. If cash balances are within this interval, no transfers between cash and portfolio securities takes place. If cash falls beneath zero, securities should be sold to return the cash balance to zero. If cash exceeds L*, cash should be invested in the portfolio to reduce the cash balance to L*. We derive closed form solutions for L*, and show how this responds to changes in transactions costs and other parameters of cash flows and portfolio returns. Finally, a closed form estimate of expected turnover associated with optimal strategies is derived.

Date: 1995-03-01
References: Add references at CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
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:ucb:calbrf:rpf-244

Ordering information: This working paper can be ordered from
IBER, F502 Haas Building, University of California at Berkeley, Berkeley CA 94720-1922

Access Statistics for this paper

More papers in Research Program in Finance Working Papers from University of California at Berkeley University of California at Berkeley, Berkeley, CA USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().

 
Page updated 2022-01-17
Handle: RePEc:ucb:calbrf:rpf-244