Multiperiod portfolio optimization with multiple risky assets and general transaction costs

By Xiaoling Mei, Victor DeMiguel, Francisco Javier Nogales. 2016

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We analyze the optimal portfolio policy for a multiperiod mean–variance investor facing multiple risky assets in the presence of general transaction costs. For proportional transaction costs, we give a closed-form expression for a no-trade region, shaped as a multi-dimensional parallelogram, and show how the optimal portfolio policy can be efficiently computed for many risky assets by solving a single quadratic program. For market impact costs, we show that at each period it is optimal to trade to the boundary of a state-dependent rebalancing region. Finally, we show empirically that the losses associated with ignoring transaction costs and behaving myopically may be large.

Subfields: Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/123fa3367f289c00a125bdf8377bdad4ce518322