Models and Simulations for Portfolio Rebalancing

Authors:
Gianfranco Guastaroba;Renata Mansini;M. Grazia Speranza
Affiliations:
Department of Quantitative Methods, University of Brescia, Brescia, Italy 25122;Department of Electronics for Automation, University of Brescia, Brescia, Italy 25123;Department of Quantitative Methods, University of Brescia, Brescia, Italy 25122
Venue:
Computational Economics
Year:
2009

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Abstract

In 1950 Markowitz first formalized the portfolio optimization problem in terms of mean return and variance. Since then, the mean-variance model has played a crucial role in single-period portfolio optimization theory and practice. In this paper we study the optimal portfolio selection problem in a multi-period framework, by considering fixed and proportional transaction costs and evaluating how much they affect a re-investment strategy. Specifically, we modify the single-period portfolio optimization model, based on the Conditional Value at Risk (CVaR) as measure of risk, to introduce portfolio rebalancing. The aim is to provide investors and financial institutions with an effective tool to better exploit new information made available by the market. We then suggest a procedure to use the proposed optimization model in a multi-period framework. Extensive computational results based on different historical data sets from German Stock Exchange Market (XETRA) are presented.