TY - JOUR T1 - Using Dynamic Programming to Optimally Rebalance Portfolios JF - The Journal of Trading SP - 16 LP - 27 DO - 10.3905/jot.2006.628191 VL - 1 IS - 2 AU - Walter Sun AU - Ayres Fan AU - Li-Wei Chen AU - Tom Schouwenaars AU - Marius A. Albota Y1 - 2006/03/31 UR - https://pm-research.com/content/1/2/16.abstract N2 - The authors propose a different framework that quantifies the cost of a rebalancing strategy in terms of risk-adjusted returns net of transaction costs. They then derive an optimal rebalancing strategy that actively seeks to minimize that cost. Certainty equivalents and the transaction costs associated with a policy to define a cost-to-go function are used, with the expected cost-to-go minimized using dynamic programming. They apply Monte Carlo simulations to demonstrate that their method outperforms traditional rebalancing strategies like monthly, quarterly, annual, and 5% tolerance rebalancing. They also show the robustness of our method to model error by performing sensitivity analyses.TOPICS: Simulations, portfolio construction, performance measurement ER -