Large-Scale Portfolio Allocation Under Transaction Costs and Model Uncertainty

Nikolaus Hautsch and Stefan Voigt

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Abstract: We theoretically and empirically study portfolio optimization under transaction costs and establish a link between turnover penalization and covariance shrinkage with the penalization governed by transaction costs. We show how the ex ante incorporation of transaction costs shifts optimal portfolios towards regularized versions of efficient allocations. The regulatory effect of transaction costs is studied in an econometric setting incorporating parameter uncertainty and optimally combining predictive distributions resulting from high-frequency and low-frequency data. In an extensive empirical study, we illustrate that turnover penalization is more effective than commonly employed shrinkage methods and is crucial in order to construct empirically well-performing portfolios.

Date: 2017-09, Revised 2018-06
New Economics Papers: this item is included in nep-upt
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Published in Journal of Econometrics, 2019, 212(1), p. 221-240

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Related works:
Journal Article: Large-scale portfolio allocation under transaction costs and model uncertainty (2019)
Working Paper: Large-scale portfolio allocation under transaction costs and model uncertainty (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1709.06296

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