Optimal Rebalancing Frequencies for Multidimensional Portfolios

TL;DR

This paper investigates how to optimally choose rebalancing frequencies for multidimensional portfolios considering small transaction costs, deriving explicit formulas and comparing performance through simulations.

Contribution

It introduces a novel approach to optimize trading frequencies instead of no-trade regions in a multidimensional setting with explicit formulas.

Findings

Derived explicit formulas for optimal rebalancing frequencies.

Quantified welfare losses due to transaction costs.

Compared performance of strategies using Monte Carlo simulations.

Abstract

We study optimal investment with multiple assets in the presence of small proportional transaction costs. Rather than computing an asymptotically optimal no-trade region, we optimize over suitable trading frequencies. We derive explicit formulas for these and the associated welfare losses due to small transaction costs in a general, multidimensional diffusion setting, and compare their performance to a number of alternatives using Monte Carlo simulations.