Mean-variance Dynamic Portfolio Allocation with Transaction Costs: A Wiener Chaos Expansion Approach

This paper studies the multi-period mean-variance portfolio allocation problem with transaction costs. Many methods have been proposed these last years to challenge the famous uni-period Markowitz strategy.But these methods cannot integrate transaction costs or become computationally heavy and hardl...

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Bibliographic Details
Published inApplied mathematical finance. pp. 1 - 41
Main Authors Cousin, Areski, Lelong, J., Picard, T.
Format Journal Article
LanguageEnglish
Published Taylor & Francis (Routledge): SSH Titles 07.08.2024
Subjects
Computational Finance
Mathematics
Portfolio Management
Probability
Quantitative Finance
mean-variance formulation
multi-period portfolio allocation
Wiener chaos expansion
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Summary:This paper studies the multi-period mean-variance portfolio allocation problem with transaction costs. Many methods have been proposed these last years to challenge the famous uni-period Markowitz strategy.But these methods cannot integrate transaction costs or become computationally heavy and hardly applicable. In this paper, we try to tackle this allocation problem by proposing an innovative approach which relies on representing the set of admissible portfolios by a finite dimensional Wiener chaos expansion. This numerical method is able to find an optimal strategy for the allocation problem subject to transaction costs. To complete the study, the link between optimal portfolios submitted to transaction costs and the underlying risk aversion is investigated. Then a competitive and compliant benchmark based on the sequential uni-period Markowitz strategy is built to highlight the efficiency of our approach.
ISSN:1350-486X
1466-4313
DOI:10.1080/1350486X.2024.2357200