Infrequent rebalancing boosts stock returns and market predictability, study finds.
Infrequent rebalancing of assets can affect how stock returns behave. When rebalancing happens less often, it can lead to patterns in returns that match what we see in real-life trading. Return autocorrelations can change direction and become positive when rebalancing occurs. Also, when more traders rebalance, the differences in expected returns between stocks become more significant. This can create seasonal trends in stock returns that align with what we observe in the market.