Discrete Portfolio Adjustment with Fixed Transaction Costs

Linus Wilson

The Review of Finance and Banking, 2016, vol. 08, issue 2, 055-060

Abstract: This paper presents a closed-form solution to the portfolio adjustment problem in discrete time when an investor faces fixed transaction costs. This transaction cost model assumes a mean-variance investor who wants to adjust her holdings of a risky and risk-free asset. It is shown how this model can be calibrated to be used with a variety of risk models such as life cycle portfolio weights and value at risk (VaR) models. The decision problem can easily be inputted into and calculated in Excel. This paper finds that investors facing lower fixed transaction costs, with higher account balances, and with a greater mismatch between their desired and current allocations will be more eager to rebalance.

Date: 2016
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