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Portfolio Optimisation and Endogenous Rebalancing Methods

Author

Listed:
  • Guilherme Demos

    (ETH Zurich)

  • Thomas Pires

    (UFSC)

  • Guilherme Valle Moura

    (UFSC)

Abstract

Investment managers often rebalance portfolios using it ad-hoc criteria due the trade-off between gains from updating optimal weight and costs incurred from changing the portfolio composition. A common solution for this stalemate is rebalancing the portfolio based on some exogenous criteria. By monitoring the optimal weights of the portfolio through control charts, the authors propose a portfolio rebalance strategy based solely on endogenous information. The optimal portfolio weights are thus monitored daily and if statistical significant changes are detected we either rebalance or not the portfolio thus avoiding transaction costs. The performance of the rebalancing strategy is then compared with different periodical strategies based on indicators such as Turnover and Sharpe-Ratio. Our results suggest that rebalancing strategies based on signals from control charts outperform those based solely on exogenous criteria, thus yielding economical gains to the investor.

Suggested Citation

  • Guilherme Demos & Thomas Pires & Guilherme Valle Moura, 2015. "Portfolio Optimisation and Endogenous Rebalancing Methods," Brazilian Review of Finance, Brazilian Society of Finance, vol. 13(4), pages 544-570.
    • Handle: RePEc:brf:journl:v:13:y:2015:i:4:p:544-570
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    More about this item

    Keywords

    Global Minimum Variance Portfolio; Statistical Processes Control; Control Charts;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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