IDEAS home Printed from https://ideas.repec.org/a/bpj/apjrin/v8y2014i2p35n6.html
   My bibliography  Save this article

Optimal Symmetric No-Trade Ranges in Asset Rebalancing Strategy with Transaction Costs

Author

Listed:
  • Hibiki Norio

    (Department of Administration Engineering, Faculty of Science and Technology, Keio University, 3-14-1 Hiyoshi, Kohoku-ku, Yokohama 223-8522, Japan)

  • Yamamoto Rei

    (Rei Yamamoto, Mitsubishi UFJ Trust Investment Technology Institute Co., Ltd., 4-2-6, Akasaka, Minato-ku, Tokyo 107-0052, Japan)

Abstract

There are many studies of optimal asset allocation with transaction costs in academic literatures. However, those are numerically solved for two-asset and three-asset cases. In contrast, the investment in five-asset classes (domestic bond and stock, international bond and stock, and cash) is at least required for practical pension fund management. Therefore, there are some real limitations to the continuous-time approach used in the previous literatures, which are the methods of solving the Hamilton-Bellman-Jacobi (HJB) equation for the stochastic control problem. In general, most investors use the rebalance rule with the no-trade ranges in practice which are constant and symmetric to the policy asset mix because it is easy to use the rule. In this paper, we propose the optimization model for the multiple asset allocation problem with transaction costs to determine the symmetric no-trade ranges of the policy asset mix using the derivative-free optimization (DFO) approach proposed by Hibiki et al. (2014). Specifically, we solve the five-asset problem with boundary constraints for cash for the Government Pension Investment Fund (GPIF) in Japan in a discrete-time and finite-period setting. We clarify the fact that we need to adjust the amounts of risky assets even within the no-trade range if the boundary constraints for cash are required, and we describe the simulation procedure in the discrete-time model. We examine the difference for various time intervals and horizons and conduct the sensitivity analysis for the various proportional transaction cost rates, the tracking error aversions, and the bounds for cash constraints. In addition, we compare the optimal time-dependent no-trade ranges with the constant no-trade ranges. The numerical results show the possibilities of applying the DFO model to the practical problem determining the symmetric no-trade ranges.

Suggested Citation

  • Hibiki Norio & Yamamoto Rei, 2014. "Optimal Symmetric No-Trade Ranges in Asset Rebalancing Strategy with Transaction Costs," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 8(2), pages 1-35, July.
    • Handle: RePEc:bpj:apjrin:v:8:y:2014:i:2:p:35:n:6
    DOI: 10.1515/apjri-2013-0024
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/apjri-2013-0024
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/apjri-2013-0024?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Stanley Pliska & Kiyoshi Suzuki, 2004. "Optimal tracking for asset allocation with fixed and proportional transaction costs," Quantitative Finance, Taylor & Francis Journals, vol. 4(2), pages 233-243.
    2. Hayne E. Leland, 1996. "Optimal Asset Rebalancing in the Presence of Transactions Costs," Finance 9610004, University Library of Munich, Germany, revised 29 Oct 1996.
    3. C. Atkinson & P. Ingpochai, 2010. "Optimization of N-risky asset portfolios with stochastic variance and transaction costs," Quantitative Finance, Taylor & Francis Journals, vol. 10(5), pages 503-514.
    4. Hong Liu & Mark Loewenstein, 2002. "Optimal Portfolio Selection with Transaction Costs and Finite Horizons," The Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 805-835.
    5. Gerard Gennotte & Alan Jung, 1994. "Investment Strategies under Transaction Costs: The Finite Horizon Case," Management Science, INFORMS, vol. 40(3), pages 385-404, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Min Dai & Zuo Quan Xu & Xun Yu Zhou, 2009. "Continuous-Time Markowitz's Model with Transaction Costs," Papers 0906.0678, arXiv.org.
    2. Xinfu Chen & Min Dai & Wei Jiang & Cong Qin, 2022. "Asymptotic analysis of long‐term investment with two illiquid and correlated assets," Mathematical Finance, Wiley Blackwell, vol. 32(4), pages 1133-1169, October.
    3. Dai, Min & Wang, Hefei & Yang, Zhou, 2012. "Leverage management in a bull–bear switching market," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1585-1599.
    4. Dumas, Bernard & Buss, Adrian, 2015. "Trading Fees and Slow-Moving Capital," CEPR Discussion Papers 10737, C.E.P.R. Discussion Papers.
    5. Adrian Buss & Bernard Dumas, 2019. "The Dynamic Properties of Financial‐Market Equilibrium with Trading Fees," Journal of Finance, American Finance Association, vol. 74(2), pages 795-844, April.
    6. Korniotis, George & Bonaparte, Yosef & Kumar, Alok, 2020. "Income Risk and Stock Market Entry/Exit Decisions," CEPR Discussion Papers 15370, C.E.P.R. Discussion Papers.
    7. Michal Czerwonko & Stylianos Perrakis, 2016. "Portfolio Selection with Transaction Costs and Jump-Diffusion Asset Dynamics I: A Numerical Solution," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 1-23, December.
    8. Buss, Adrian & Uppal, Raman & Vilkov, Grigory, 2015. "Asset prices in general equilibrium with recursive utility and illiquidity induced by transactions costs," SAFE Working Paper Series 41, Leibniz Institute for Financial Research SAFE, revised 2015.
    9. Rim Bernoussi & Michael Rockinger, 2023. "Rebalancing with transaction costs: theory, simulations, and actual data," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 37(2), pages 121-160, June.
    10. Maxim Bichuch, 2011. "Asymptotic Analysis for Optimal Investment in Finite Time with Transaction Costs," Papers 1112.2749, arXiv.org.
    11. Paul Ehling & Michael Gallmeyer & Sanjay Srivastava & Stathis Tompaidis & Chunyu Yang, 2018. "Portfolio Tax Trading with Carryover Losses," Management Science, INFORMS, vol. 64(9), pages 4156-4176, September.
    12. Chen, Xu & Yang, Xiang-qun, 2015. "Optimal consumption and investment problem with random horizon in a BMAP model," Insurance: Mathematics and Economics, Elsevier, vol. 61(C), pages 197-205.
    13. Palczewski, Jan & Poulsen, Rolf & Schenk-Hoppé, Klaus Reiner & Wang, Huamao, 2015. "Dynamic portfolio optimization with transaction costs and state-dependent drift," European Journal of Operational Research, Elsevier, vol. 243(3), pages 921-931.
    14. Chong, Zhiwei, 2010. "Rational expectations equilibrium with transaction costs in financial markets," MPRA Paper 34444, University Library of Munich, Germany, revised 14 Jul 2011.
    15. Baojun Bian & Xinfu Chen & Min Dai & Shuaijie Qian, 2021. "Penalty method for portfolio selection with capital gains tax," Mathematical Finance, Wiley Blackwell, vol. 31(3), pages 1013-1055, July.
    16. Lionel Martellini & Branko Uroševi'{c}, 2006. "Static Mean-Variance Analysis with Uncertain Time Horizon," Management Science, INFORMS, vol. 52(6), pages 955-964, June.
    17. Ang, Andrew & Bekaert, Geert & Liu, Jun, 2005. "Why stocks may disappoint," Journal of Financial Economics, Elsevier, vol. 76(3), pages 471-508, June.
    18. Yiannis Kamarianakis & Anastasios Xepapadeas, 2007. "An Irreversible Investment Model with a Stochastic Production Capacity and Fixed Plus Proportional Adjustment Costs," Working Papers 0708, University of Crete, Department of Economics.
    19. Seydel, Roland C., 2009. "Existence and uniqueness of viscosity solutions for QVI associated with impulse control of jump-diffusions," Stochastic Processes and their Applications, Elsevier, vol. 119(10), pages 3719-3748, October.
    20. Mark Broadie & Weiwei Shen, 2016. "High-Dimensional Portfolio Optimization With Transaction Costs," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-49, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:apjrin:v:8:y:2014:i:2:p:35:n:6. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.