Value of liquidity
Chiquoine, Ben wrote:
I am trying to come up with a value for liquidity where I define liquidity as the ability to rebalance your portfolio. My thought at how to do this is to start with a set of assets. Given their expected returns, volatilities, and correlations I will pick an efficient portfolio. I will then run a Monte-Carlo simulation using the efficient weights, expected returns, vols, and correlations to look at the expected distribution of returns. I will compare this to the return distribution from a Monte-Carlo simulation in which my I rebalance my portfolio to the efficient weights every year. Eventually I'd like to allow or disallow rebalancing to a select subset of the assets in the portfolio (say private equity and absolute return) while rebalancing to optimal weights (as much as possible) the remaining assets. I'm really new to Monte-Carlo simulation so my question has three parts. First, is this idea completely crazy? Second, is their a preexisting R package that is designed to be used for portfolio asset allocation? Third, if no package exists to do this what is the data generating process I should use to model portfolio returns for a portfolio with multiple, correlated, underlying assets? I hope this is the right forum for this and that a similar issue had not already been addressed. Thanks in advance for any suggestions you can provide.
There are many packages available in R for performing Monte Carlo simulation, and many packages for optimization under various constraints. Someone has already suggested that you check out fPortfolio, and there are many more. I suggest that you start with the quantitative finance task view on CRAN. If you want to maximise the help you receive from this list, you will need to be a bit more specific in your questioning. Preferably, share code and data and someone here will almost certainly help you make it work the way you want. Regards, - Brian