Optimal Portfolio Rebalancing with Sweep Under Transaction Cost

Arjmandi, Nabi (2023): Optimal Portfolio Rebalancing with Sweep Under Transaction Cost.

Abstract

This paper investigates the optimal portfolio rebalancing strategy for assets with cash distributions and proportional transaction costs. A sweep account is an account that is used as the default destination for coupon and dividend proceeds as they arrive. In this study, we incorporate this account and investigate the optimal strategy for the sweep account manager. Our results indicate that the "no-transaction" region is split into two sub-regions, where the cash proceeds are either invested entirely in the riskless asset or in the risky asset, depending on the transaction costs. Additionally, we analyze the impact of the assets' cash distributions and the investors' investment horizon on the demand for the assets. Our findings suggest that changes in the cash distribution of assets, depending on the relative magnitude of transaction costs for risky and riskless assets, can have a varying impact on asset demand. In particular, our results indicate that when the transaction cost for the riskless asset is low, an increase in the cash distributions from the risky asset and an increase in the investor's investment horizon have a positive impact on the liquidity premium of the risky asset.

• Item Type: MPRA Paper
• Language: English
• Keywords: Transaction cost, Sweep account, Liquidity premium, Portfolio optimization, Continuous-Time methods.
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency ; Cost-Benefit Analysis; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors

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