Please use this identifier to cite or link to this item: https://hdl.handle.net/10356/159367
Title: Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint
Authors: Pun, Chi Seng
Ye, Zi
Keywords: Science::Mathematics
Issue Date: 2022
Source: Pun, C. S. & Ye, Z. (2022). Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint. Automatica, 135, 109986-. https://dx.doi.org/10.1016/j.automatica.2021.109986
Project: MOE2017-T2-1-044
Journal: Automatica
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.
URI: https://hdl.handle.net/10356/159367
ISSN: 0005-1098
DOI: 10.1016/j.automatica.2021.109986
Rights: © 2021 Elsevier Ltd. All rights reserved.
Fulltext Permission: none
Fulltext Availability: No Fulltext
Appears in Collections:SPMS Journal Articles

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