|
Archive@NYU >
Stern School of Business >
Finance Working Papers >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27003
|
| Title: | Predictability and Transaction Costs: The Impact on Rebalancing Rules
and Behavior |
| Authors: | Lynch, Anthony W.
Balduzzi, Pierluigi |
| Issue Date: | 22-Oct-1998 |
| Series/Report no.: | FIN-98-049 |
| Abstract: | We consider the impact of transaction costs on the portfolio decisions
of a long-lived agent with isoelastic preferences. In particular, we
focus on how portfolio choice, rebalancing frequency and average cost
incurred change over the lifecycle are affected by return
predictability. Two types of costs are evaluated: proportional to the
change in the holding of the risky asset and a fixed fraction of
portfolio value. We find that realistic transaction costs can materially
affect rebalancing behavior, creating no-trade regions that widen near
the investor's terminal date. At the same time, realistic proportional
and fixed costs have little effect on the midpoint of the no-trade
region, unless liquidation costs differ across assets. Return
predictability calibrated to U.S. stock returns is found to have large
effects on rebalancing behavior relative to independent and identically
distributed (i.i.d.) returns with the same unconditional distribution.
For example, return predictability causes rebalancing frequency to
increase, and cost incurred to increase by an order of magnitude, at all
points in the investor's life. No-trade regions early in life are wider
when returns are predictable than when they are not. Finally, we find
that the nature of the return predictability, including the presence or
not of return heteroscedasticity, can have large effects on rebalancing behavior. |
| URI: | http://hdl.handle.net/2451/27003 |
| Appears in Collections: | Finance Working Papers
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
