Rebalancing Frequency Considerations for Kelly-Optimal Stock Portfolios in a Control-Theoretic Framework

TL;DR

This paper investigates how rebalancing frequency affects Kelly-optimal stock portfolios within a control-theoretic framework, revealing conditions where high-frequency trading offers no performance advantage and identifying when a single dominant asset suffices.

Contribution

It extends Kelly portfolio analysis to multiple assets, introduces the concept of dominance, and shows when rebalancing frequency becomes irrelevant for optimal performance.

Findings

High-frequency trading does not always improve performance.

Presence of a dominant asset leads to a single-asset portfolio regardless of rebalancing frequency.

Simulations confirm theoretical results with real stock data.

Abstract

In this paper, motivated by the celebrated work of Kelly, we consider the problem of portfolio weight selection to maximize expected logarithmic growth. Going beyond existing literature, our focal point here is the rebalancing frequency which we include as an additional parameter in our analysis. The problem is first set in a control-theoretic framework, and then, the main question we address is as follows: In the absence of transaction costs, does high-frequency trading always lead to the best performance? Related to this is our prior work on betting, also in the Kelly context, which examines the impact of making a wager and letting it ride. Our results on betting frequency can be interpreted in the context of weight selection for a two-asset portfolio consisting of one risky asset and one riskless asset. With regard to the question above, our prior results indicate that it is often the case that there are no performance benefits associated with high-frequency trading. In the present paper, we generalize the analysis to portfolios with multiple risky assets. We show that if there is an asset satisfying a new condition which we call dominance, then an optimal portfolio consists of this asset alone; i.e., the trader has "all eggs in one basket" and performance becomes a constant function of rebalancing frequency. Said another way, the problem of rebalancing is rendered moot. The paper also includes simulations which address practical considerations associated with real stock prices and the dominant asset condition.