A Rational Multi-Asset Portfolio Rebalancing Decision-Making Framework.

The authors propose a comprehensive, rigorous, and quantitative decision-making framework that considers the important elements for selecting an optimal multi-asset portfolio rebalancing strategy. These aspects are typically ignored in traditional rebalancing research, which either leverages one historical sample path for asset returns in the analysis or ignores transaction costs (or assumes static transaction costs) or does not propose an optimal rebalancing strategy. In particular, the proposed framework incorporates a simulation engine to model the inherent return uncertainty of assets as well as a dynamic transaction cost simulations model that links the bid-ask spread with the market condition, and a utility-based optimization engine that determines the optimal rebalancing strategy while simultaneously quantifying its benefit. Additionally, the framework allows for attributing the source of benefit of one rebalancing approach relative to another and in which market environments those benefits typically play out. [ABSTRACT FROM AUTHOR]