Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint
This paper studies mean–variance portfolio selection problem subject to proportional transaction costs and no-shorting constraint. We do not impose any distributional assumptions on the asset returns. By adopting dynamic programming, duality theory, and a comparison approach, we manage to derive a s...
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| Published in | Automatica (Oxford) Vol. 135; p. 109986 |
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| Main Authors | , |
| Format | Journal Article |
| Language | English |
| Published |
Elsevier Ltd
01.01.2022
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| Abstract | This paper studies mean–variance portfolio selection problem subject to proportional transaction costs and no-shorting constraint. We do not impose any distributional assumptions on the asset returns. By adopting dynamic programming, duality theory, and a comparison approach, we manage to derive a semi-closed form solution of the optimal dynamic investment policy with the boundaries of buying, no-transaction, selling, and liquidation regions. Numerically, we illustrate the properties of the optimal policy by depicting the corresponding efficient frontiers under different rates of transaction costs and initial wealth allocations. We find that the efficient frontier is distorted due to the transaction cost incurred. We also examine how the width of the no-transaction region varies with different transaction cost rates. Empirically, we show that our transaction-cost-aware policy outperforms the transaction-cost-unaware policy in a realistic trading environment that incurs transaction costs |
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| AbstractList | This paper studies mean–variance portfolio selection problem subject to proportional transaction costs and no-shorting constraint. We do not impose any distributional assumptions on the asset returns. By adopting dynamic programming, duality theory, and a comparison approach, we manage to derive a semi-closed form solution of the optimal dynamic investment policy with the boundaries of buying, no-transaction, selling, and liquidation regions. Numerically, we illustrate the properties of the optimal policy by depicting the corresponding efficient frontiers under different rates of transaction costs and initial wealth allocations. We find that the efficient frontier is distorted due to the transaction cost incurred. We also examine how the width of the no-transaction region varies with different transaction cost rates. Empirically, we show that our transaction-cost-aware policy outperforms the transaction-cost-unaware policy in a realistic trading environment that incurs transaction costs |
| ArticleNumber | 109986 |
| Author | Ye, Zi Pun, Chi Seng |
| Author_xml | – sequence: 1 givenname: Chi Seng surname: Pun fullname: Pun, Chi Seng email: cspun@ntu.edu.sg – sequence: 2 givenname: Zi surname: Ye fullname: Ye, Zi |
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| Cites_doi | 10.1086/261410 10.1007/s10479-014-1574-x 10.1287/mnsc.25.11.1127 10.1287/moor.15.4.676 10.1111/jofi.12080 10.1016/j.jet.2016.06.001 10.1080/135048602100056 10.1016/0022-0531(71)90038-X 10.2139/ssrn.3756104 10.1287/mnsc.2016.2650 10.1214/12-AAP855 10.1137/15M1032533 10.1016/j.automatica.2016.02.017 10.1016/j.ejor.2019.05.009 10.2307/1926560 10.1111/mafi.12093 10.3934/jimo.2013.9.643 10.1007/s002450010003 10.1093/rfs/15.3.805 10.1080/14697688.2020.1781237 10.1080/10920277.1997.10595602 10.1080/14697688.2020.1777321 10.1016/j.ejor.2013.02.040 10.1111/j.0960-1627.2005.00218.x 10.1016/j.jbankfin.2016.04.002 10.1137/S0363012900378504 10.1109/TAC.2004.824479 10.1287/mnsc.40.3.385 10.1016/0022-0531(76)90018-1 10.1137/080742889 10.1137/120898991 10.1111/1467-9965.00100 |
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| Keywords | Discrete-time dynamic programming Portfolio selection Embedding technique Proportional transaction costs No-shorting constraint |
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| SubjectTerms | Discrete-time dynamic programming Embedding technique No-shorting constraint Portfolio selection Proportional transaction costs |
| Title | Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint |
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