RT Journal Article
SR Electronic
T1 The Term Structure of the Rebalancing Premium
JF The Journal of Investing
FD Institutional Investor Journals
SP 116
OP 125
DO 10.3905/joi.2020.1.127
VO 29
IS 4
A1 Liu, Xiaoyang
A1 Viswanathan, Vivek
YR 2020
UL http://joi.pm-research.com/content/29/4/116.abstract
AB The optimal rebalance interval that maximizes the expected geometric return of passive strategies decreases in relation to increasing asset volatility, increasing dispersion in asset volatility, and increasing negative 1-month autocorrelation of asset returns. Conversely, the optimal rebalance interval increases in relation to increasing positive 1-month return autocorrelation and increasing dispersion in expected return of the underlying assets. Much of the literature on the rebalancing premium has focused on the effect of asset volatility. But empirically, the positive autocorrelation of asset returns and the dispersion in asset expected returns have a much larger impact on the rebalancing premium. Depending on the set of assets chosen, the optimal rebalance frequency can vary between 6 months for an equal-weighted portfolio of multiple asset classes and 10 years for an equal-weighted portfolio of regional indices. The large variation in optimal rebalance frequency challenges the notion of a universal rebalancing premium.TOPICS: Portfolio construction, wealth management, pension fundsKey Findings• The empirical and theoretical term structure of the rebalancing premium is driven primarily by return dispersion in asset classes and the autocorrelation of return.• The optimal rebalancing frequency to maximize return varies between 6 months and at least 10 years, depending on the particular set of asset classes in the portfolio.