Stochastic mean absolute deviation model with random transaction costs: securities from the Johannesburg stock market

S. Mushori and D. Chikobvu

International Journal of Operational Research, 2016, vol. 26, issue 2, 127-152

Abstract: We propose a multi-stage stochastic mean absolute deviation model with random transaction costs in optimal portfolio selection. We take implicit costs incurred in trading as our transaction costs. The multi-stage stochastic model captures risk due to uncertainty, as well as implicit transaction costs incurred by an investor during initial trading and subsequent rebalancing of the portfolio. We apply the model to securities on the Johannesburg stock market and find out that implicit transaction costs are at least 14.3% of returns on investment.

Keywords: stochastic mean absolute deviation; random transaction costs; uncertainty; risk; stochastic modelling; portfolio rebalancing; securities; South Africa; stock markets; implicit costs; return on investment; RoI. (search for similar items in EconPapers)
Date: 2016
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