Institutional stock-bond portfolios rebalancing and financial stability: Norway as a case study

In this paper, we examine rebalancing strategies for long-term institutional investors. Specifically, we test the difference in risk-adjusted performance between stock-bond portfolios based on buy-and-hold, periodic and threshold rebalancing strategies. Using the Norwegian Sovereign Wealth Fund (SWF) as a benchmark and an econometric approach based on a bootstrap test of Sharpe ratio differences, we show that the optimal rebalancing differs across economic and financial cycles. Furthermore, we find that the optimal strategy is periodic rebalancing except during recessions and crises when the buy-and-hold approach is best, thus calling into question the hypothesis of the countercyclical behaviour of SWFs. Our results are robust to alternative performance measures, asset allocations, investment horizons, rebalancing rules, nonnormal and noniid returns, transaction costs and time sampling. Finally, our findings promote the consideration of macroprudential rules to improve the Santiago Principles and a specific monitoring framework targeted at SWFs.