Non-Linear Transaction Costs Inclusion in Mean-Variance Optimization

José Euclides de Melo Ferraz () and Christian Zimmer
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José Euclides de Melo Ferraz: Banco Itaú

Brazilian Review of Finance, 2005, vol. 3, issue 2, 195-221

Abstract: In this article we propose a new way to include transaction costs into a mean-variance portfolio optimization. We consider brokerage fees, bid/ask spread and the market impact of the trade. A pragmatic algorithm is proposed, which approximates the optimal portfolio, and we can show that is converges in the absence of restrictions. Using Brazilian financial market data we compare our approximation algorithm with the results of a non-linear optimizer.

Keywords: portfolio optimization; transaction costs; bid-ask spread; market impact (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:3:y:2005:i:2:p:195-221

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