Portfolio optimization with transaction costs: a two-period mean-variance model

Ying Fu (), Kien Ng, Boray Huang () and Huei Huang

Annals of Operations Research, 2015, vol. 233, issue 1, 135-156

Abstract: In this paper, we study a multiperiod mean-variance portfolio optimization problem in the presence of proportional transaction costs. Many existing studies have shown that transaction costs can significantly affect investors’ behavior. However, even under simple assumptions, closed-form solutions are not easy to obtain when transaction costs are considered. As a result, they are often ignored in multiperiod portfolio analysis, which leads to suboptimal solutions. To provide better insight for this complex problem, this paper studies a two-period problem that considers one risk-free and one risky asset. Whenever there is a trade after the initial asset allocation, the investor incurs a linear transaction cost. Through a mean-variance model, we derive the closed-form expressions of the optimal thresholds for investors to re-allocate their resources. These thresholds divide the action space into three regions. Some important properties of the analytical solution are identified, which shed light on solving multiperiod problems. Copyright Springer Science+Business Media New York 2015

Keywords: Investment analysis; Multiperiod portfolio optimization; Mean-variance analysis; Transaction costs (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10479-014-1574-x

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