Markowitz portfolios under transaction costs

Olivier Ledoit and Michael Wolf

The Quarterly Review of Economics and Finance, 2025, vol. 100, issue C

Abstract: Markowitz portfolio selection is a cornerstone in finance, in academia as well as in the industry. Most academic studies either ignore transaction costs or account for them in a way that is both unrealistic and suboptimal by (i) assuming transaction costs to be constant across stocks and (ii) ignoring them at the portfolio-selection state and simply paying them after the fact. Our paper proposes a method to fix both shortcomings. As we show, if transaction costs are accounted for (properly) at the portfolio-selection stage, net performance in terms of the Sharpe ratio often increases, in particular for high-turnover strategies.

Keywords: Covariance matrix estimation; Mean-variance efficiency; Multivariate GARCH; Portfolio selection; Transaction costs (search for similar items in EconPapers)
JEL-codes: C13 G11 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:100:y:2025:i:c:s1062976925000031

DOI: 10.1016/j.qref.2025.101962

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