Value of liquidity
hi: i can't answer your questions below but Markovwtz-Van Dijk ( spelling on Van Djil may be incorrect ) came up with some heuristic a few years back for balancing the cost of rebalancing versus the expected gain in return from rebalancing. mark kritzman ( state street ) has a powerpoint presentation that gives an overview of the idea ( that's on the net. i can find it , if you can't ) but I don't know the title of the original paper nor the journal it's in, assuming it was published somewhere. if you find it, can you let me know where it is. thanks.
On Thu, Oct 16, 2008 at 10:16 AM, Chiquoine, Ben wrote:
Hi, 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. Ben
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