Advancement of Optimal Portfolio Models with Short Sales and Transaction Costs: Methodology and Effectiveness

Paul W. Chiou and Jing-Rung Yu

Chapter 103 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 3387-3410 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This paper presents the advancement of several widely applied portfolio models to ensure flexibility in their applications: Mean-variance (MV), Mean-absolute deviation (MAD), Linearized value-at-risk (LVaR), Conditional value-at-risk (CVaR), and Omega models. We include short sales and transaction costs in modeling portfolios and further investigate their effectiveness. Using the daily data of international ETFs over 15 years, we generate the results of the rebalancing portfolios. The empirical findings show that the MV, MAD, and Omega models yield a higher realized return with lower portfolio diversity than the LVaR and CVaR models. The outperformance of these risk–return-based models over the downside-risk-focused models comes from efficient asset allocation and not only the saving of transaction costs.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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