Strategic Asset Allocation with Predictable Returns and Transaction Costs
Coauthor(s): Pierre Collin-Dufresne, Ciamac Moallemi, Mehmet Saglam.
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We propose a factor-based model that incorporates common factor shocks for the security returns. Under these realistic factor dynamics, we solve for the dynamic trading policy in the class of linear policies analytically. Our model can accommodate stochastic volatility and
liquidity as a function of same factor exposures. Calibrating our model with empirical data, we show that our trading policy achieves superior performance particularly in the presence of common factor shocks.
Collin-Dufresne, Pierre, Kent Daniel, Ciamac Moallemi, and Mehmet Saglam. "Strategic Asset Allocation with Predictable Returns and Transaction Costs." Columbia Business School, 2012.