Kai Wallbaum

Transaction costs are a major factor affecting portfolio returns in asset management. We propose an enhanced target volatility strategy to reduce the deleterious effect of transaction costs by adding rebalancing boundaries to the target volatility asset allocation mechanism. We formulate a constrained optimization problem to determine the optimal rebalancing boundary level. Based on simulations using an overlapping block bootstrap approach, we find that the extended target volatility portfolio with rebalancing boundary levels can provide better investment outcomes (higher portfolio returns and reduced transaction costs) without losing the ability to control portfolio risk under a pre-determined threshold. Further computational analysis on different real market scenarios confirms these findings and allows us to summarize insights on the appropriate boundaries to use under different market conditions and transaction cost magnitudes. Our findings have important practical implications given the popularity of the target volatility investment strategy as well as other asset management concepts with a dynamic asset allocation mechanism.

(2013). Investment instruments with volatility target mechanism. Quantitative Finance: Vol. 13, Themed Issue on Fund Management, pp. 1519-1528.

We study equity-linked life insurance contracts with minimum guarantees, where an underlying index is based on the set of stocks whose prices are described by the multidimensional model with interacting assets. We apply numerical techniques developed for pricing index options (path-dependent as well as plain index options) to valuation of such insurance contracts in the case of single and periodic premiums. We also numerically determine and discuss an implied guarantee rate of an insurance contract.