The limits of leverage

DOI10.1111/MAFI.12172MaRDI QIDQ5743123zbMATH OpenOpenAlexFDO

Authors Paolo Guasoni, Eberhard Mayerhofer

Publication date 8 May 2019

Published in Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1506.02802

zbMATH Keywords

leverageportfolio choicetransaction costs

Mathematics Subject Classification ID

Portfolio theory (91G10)

Abstract: When trading incurs proportional costs, leverage can scale an asset's return only up to a maximum multiple, which is sensitive to its volatility and liquidity. In a model with one safe and one risky asset, with constant investment opportunities and proportional costs, we find strategies that maximize long term returns given average volatility. As leverage increases, rising rebalancing costs imply declining Sharpe ratios. Beyond a critical level, even returns decline. Holding the Sharpe ratio constant, higher asset volatility leads to superior returns through lower costs.

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Cites work

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Cited in

(3)

• Optimal rebalancing frequencies for multidimensional portfolios
• LONG-TERM GROWTH RATE OF EXPECTED UTILITY FOR LEVERAGED ETFs: MARTINGALE EXTRACTION APPROACH
• Leveraged funds: robust replication and performance evaluation

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