Optimal rebalancing strategies for efficient asset pricing factor investments

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Following the 2008 global financial crisis investors have faced a challenging investment environmentcharacterized by sustained low interest rates and ongoing periods of high or extreme marketvolatility. Falling sovereign bond yields have driven up defined benefit liabilities and made it harderfor insurers and pension funds to meet target returns on guaranteed products. To remain compliantwith risk/return targets, many investors have structured their asset allocation to transparent andindividual risk factors.In this low-yield environment, passive indexation products (which capture the market risk premiumwith minimal transaction costs) are offered on a very low or no fee basis (other than custody). Whilesuch products track the market, many investors seek excess returns by tilting their portfolio awayfrom the neutral capitalisation weights toward a factor of choice, e.g. small company stocks. Withlow interest rates an efficient implementation of such offerings is key, especially helpingconservative investors like pension funds or insurers to not underperform their liability benchmarks.While the latter would have dire consequences for the financial well-being of future generations,there is little research into the design of optimal rebalancing strategies and the interplay withtransaction costs modelling. This research project is aimed at filling this gap by theoreticallyinvestigating optimal rebalancing of various factor strategies and empirically devising transactioncost models that aid and guide their practical implementation.