Paper:ewp-fin/9610004 From: Patt Bagdon < > Date: Wed, 23 Oct 1996 09:40:48 -0700 (PDT) Date (revised): Tue, 29 Oct 1996 10:10:52 -0800 (PST)
Abstract: We examine the optimal trading strategy for an investment fund which wishes to maintain two assets in fixed proportions, e.g. 60/40 in stocks and bonds. Transactions costs are assumed to be proportional to the amount of each asset traded. We show that the optimal policy involves a band about the target stock proportion. As long as the actual stock/bond ratio remains inside this band, no trading should occur. If the ratio goes outside the band, trading should be undertaken to move the ratio to the nearest edge of the band. We compute the optimal band and resulting annual turnover and tracking error of the optimal policy, as a function of transactions costs, asset volatility, the target asset mix, and other parameters. We show how changes in transactions costs and other parameters affect the size of the no-trade band, turnover, and tracking error. Compared to a quarterly rebalancing strategy an example demonstrates that the optimal strategy can reduce turnover by almost 50 percent.
EconWPA began as a conversation between Bob Parks and Larry Blume on January 28, 1993. I located Paul Ginsparg's archive (then xxx.lanl.gov) and he graciously installed his software on a Sun Sparc system which was supporting the department of economics email and computation. EconWPA began accepting papers July 1, 1993 and had ftp, email, gopher and web interfaces. The web interface for submissions was engineered into existence in July 1995. A complete and catastrophic machine failure in 1999 caused the loss of EconWPA's email new paper announcment service at which time there were over 15,000 subscriptions with over 8,000 unique email addresses.
I was told that I could keep operating EconWPA (as well as many other services including rfe.wustl.edu, barnett.wustl.edu, and three RePEc servers) but I would receive no support (hardware, software, or anthing else) and (as had been the case) no compensation. At that point, given the apparent low valuation of my activities by the department, and university, it made no sense for me to continue operating EconWPA or other services.
Thanks to all who have supported EconWPA in the past.
A Chinese curse states May you live in intersting times. I have. Bob Parks - Jan 2006