Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments July 27, 2023 erstellt
Beschreibung:
When returns are partially predictable and trading is costly, CARA investors track a target portfolio at a constant trading speed. The target portfolio is optimal for a frictionless market, where asset returns are scaled back to account for trading costs and volatilities are adjusted to proxy execution risk. The trading speed solves an optimal execution problem, which describes how the legacy portfolio inherited from past trading is tilted towards the target portfolio in an optimal manner. Unlike for period-by-period mean-variance preferences, the target portfolio and trading speed are linked through a coupled system of Riccati equations, which describe how intertemporal hedging against changing investment opportunities (Merton, 1971) interacts with the principle that one should “aim in front of the target” when trading is costly (Garleanu and Pedersen, 2013). We illustrate the practical implications of these results for the model of Koijen et al. (2009), where return predictions are based on a short-term momentum and and a long-term value signal