When to efficiently rebalance a portfolio

TL;DR

This paper analyzes the optimal timing for rebalancing portfolios using a continuous model and derives efficient discrete strategies in a high-frequency setting, improving practical implementation of constant weight strategies.

Contribution

It introduces an asymptotically optimal sequence of rebalancing strategies under a general stochastic asset model, bridging continuous and discrete rebalancing approaches.

Findings

Derived asymptotically efficient rebalancing strategies

Quantified tracking error under discrete rebalancing

Provided theoretical foundation for high-frequency portfolio management

Abstract

A constant weight asset allocation is a popular investment strategy and is optimal under a suitable continuous model. We study the tracking error for the target continuous rebalancing strategy by a feasible discrete-in-time rebalancing under a general multi-dimensional Brownian semimartingale model of asset prices. In a high-frequency asymptotic framework, we derive an asymptotically efficient sequence of simple predictable strategies.