Transaction cost optimization for online portfolio selection

Bin Li, Jialei Wang, Dingjiang Huang and Steven C. H. Hoi

Quantitative Finance, 2018, vol. 18, issue 8, 1411-1424

Abstract: To improve existing online portfolio selection strategies in the case of non-zero transaction costs, we propose a novel framework named Transaction Cost Optimization (TCO). The TCO framework incorporates the L1 norm of the difference between two consecutive allocations together with the principles of maximizing expected log return. We further solve the formulation via convex optimization, and obtain two closed-form portfolio update formulas, which follow the same principle as Proportional Portfolio Rebalancing (PPR) in industry. We empirically evaluate the proposed framework using four commonly used data-sets. Although these data-sets do not consider delisted firms and are thus subject to survival bias, empirical evaluations show that the proposed TCO framework may effectively handle reasonable transaction costs and improve existing strategies in the case of non-zero transaction costs.

Date: 2018
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Citations: View citations in EconPapers (19)

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DOI: 10.1080/14697688.2017.1357831

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