TY  - JOUR
AU  - Garleanu,Nicolae B.
AU  - Pedersen,Lasse H.
TI  - Dynamic Trading with Predictable Returns and Transaction Costs
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15205
PY  - 2009
Y2  - August 2009
UR  - http://www.nber.org/papers/w15205
L1  - http://www.nber.org/papers/w15205.pdf
N1  - Author contact info:
Nicolae B. Garleanu
Haas School of Business
F628
University of California, Berkeley
Berkeley, CA 94720
Tel: (1) 510 642 3421
Fax: (1) 510 643 1420
E-Mail: garleanu@haas.berkeley.edu

Lasse H. Pedersen
NYU Stern Finance
44 West Fourth Street
Suite 9-190
New York, NY 10012
Tel: 212/998-0359
Fax: 212/995-4233
E-Mail: lpederse@stern.nyu.edu
AB  - This paper derives in closed form the optimal dynamic portfolio policy when trading is costly and security returns are predictable by signals with different mean-reversion speeds. The optimal updated portfolio is a linear combination of the existing portfolio, the optimal portfolio absent trading costs, and the optimal portfolio based on future expected returns and transaction costs. Predictors with slower mean reversion (alpha decay) get more weight since they lead to a favorable positioning both now and in the future. We implement the optimal policy for commodity futures and show that the resulting portfolio has superior returns net of trading costs relative to more naive benchmarks. Finally, we derive natural equilibrium implications, including that demand shocks with faster mean reversion command a higher return premium.
ER  -