What Does Rebalancing Really Achieve?

Cuthbertson, K., Hayley, S., Motson, N. & Nitzsche, D. (2016). What Does Rebalancing Really Achieve?. International Journal of Finance & Economics, 21(3), pp. 224-240. doi: 10.1002/ijfe.1545

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Abstract

There is now a substantial literature on the effects of rebalancing on portfolio performance. However, this literature contains frequent misattribution between ‘rebalancing returns’ which are specific to the act of rebalancing, and ‘diversification returns’ which can be earned by both rebalanced and unrebalanced strategies. Confusion on this issue can encourage investors to follow strategies which involve insufficient diversification and excessive transactions costs. This paper identifies the misleading claims that are made for rebalanced strategies and demonstrates theoretically and by simulation that the apparent advantages of rebalanced strategies over infinite horizons give an inaccurate impression of their performance over finite horizons.

Item Type: Article
Additional Information: This is the peer reviewed version of the following article: Cuthbertson, K., Hayley, S., Motson, N., and Nitzsche, D. (2016) What Does Rebalancing Really Achieve?. Int. J. Fin. Econ., 21: 224–240, which is published in final form at http://dx.doi.org/10.1002/ijfe.1545. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Uncontrolled Keywords: rebalancing, diversification returns, excess growth, volatility pumping
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/13733

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