Cost-aware Portfolios in a Large Universe of Assets

Qingliang Fan, Marcelo C. Medeiros, Hanming Yang and Songshan Yang

Papers from arXiv.org

Abstract: This paper considers the finite horizon portfolio rebalancing problem in terms of mean-variance optimization, where decisions are made based on current information on asset returns and transaction costs. The study's novelty is that the transaction costs are integrated within the optimization problem in a high-dimensional portfolio setting where the number of assets is larger than the sample size. We propose portfolio construction and rebalancing models with nonconvex penalty considering two types of transaction cost, the proportional transaction cost and the quadratic transaction cost. We establish the desired theoretical properties under mild regularity conditions. Monte Carlo simulations and empirical studies using S&P 500 and Russell 2000 stocks show the satisfactory performance of the proposed portfolio and highlight the importance of involving the transaction costs when rebalancing a portfolio.

Date: 2024-12
References: Add references at CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2412.11575 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2412.11575

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().