Optimal rebalancing strategies reduce market variability

The increasing fraction of passive funds influences stock market variability since passive investors behave differently than active investors. We demonstrate via simulations how portfolios that rebalance between different classes of assets influence the market variability. We prove that the optimal strategy for such portfolios when we include transaction costs, is only to rebalance when the portfolio leaves a no-trade region in the state space. This is the case also when the expectation and volatility of the prices are inhomogeneous. We show that portfolios that apply an optimal rebalance strategy reduce the variability in the stock market measured in the sum of the distances between local minimum and maximum of the prices in the stock market, also when these portfolios constitute only a small part of the market. However, the more usual rebalance strategies that only consider to rebalance at the end of a month or a quarter, have a much weaker influence on the market variability.

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Publication Details

Journal
The Journal of Finance and Data Science
Published
2025-01-09
DOI
https://doi.org/10.1016/j.jfds.2025.100151
Citations
1
Primary Topic
Banking stability, regulation, efficiency
Type
article
Field-Weighted Citation Impact
2.21

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article

Optimal rebalancing strategies reduce market variability

Lars Holden, Helge Holden
1 citations
The Journal of Finance and Data Science
Banking stability, regulation, efficiency
2.21
article

Optimal rebalancing strategies reduce market variability

Lars Holden, Helge Holden
article en
1 citations

Abstract

The increasing fraction of passive funds influences stock market variability since passive investors behave differently than active investors. We demonstrate via simulations how portfolios that rebalance between different classes of assets influence the market variability. We prove that the optimal strategy for such portfolios when we include transaction costs, is only to rebalance when the portfolio leaves a no-trade region in the state space. This is the case also when the expectation and volatility of the prices are inhomogeneous. We show that portfolios that apply an optimal rebalance strategy reduce the variability in the stock market measured in the sum of the distances between local minimum and maximum of the prices in the stock market, also when these portfolios constitute only a small part of the market. However, the more usual rebalance strategies that only consider to rebalance at the end of a month or a quarter, have a much weaker influence on the market variability.

The Journal of Finance and Data ScienceVol. 11
Norwegian Computing Center (NO), Norwegian University of Science and Technology (NO)
Norges Forskningsråd
Openalex Percentile: Top 18%
Banking stability, regulation, efficiency
2.21
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