Optimal Derivatives Strategies with Discrete Rebalancing
Abstract
In this article, we determine the optimal investmentstrategy with derivatives for discrete rebalancing intervals.We find that the investor buys a more conservativeportfolio and strongly reduces his exposure tovolatility compared to the continuous-time case. Thisleads to much less extreme positions in the derivatives.Even with monthly rebalancing, the investorcan nevertheless realize up to almost two-thirds ofthe utility gain from option trading in continuoustime. Variance contracts are useful due to their stable exposures to volatility and jump risk.
Keywords
Asset Allocation; Discrete Trading; Use of Derivatives
Cite as
Branger, N., Breuer, B., & Schlag, C. (2008). Optimal Derivatives Strategies with Discrete Rebalancing. Journal of Derivatives, 16(2), 67–84.Details
Publication type
Research article (journal)
Peer reviewed
Yes
Publication status
Published
Year
2008
Journal
Journal of Derivatives
Volume
16
Issue
2
Start page
67
End page
84
Language
English
ISSN
1074-1240
DOI
Full text