Impact of proportional transaction costs on systematically generated portfolios

Johannes Ruf and Kangjianan Xie

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The effect of proportional transaction costs on systematically generated portfolios is studied em- pirically. The performance of several portfolios (the index tracking portfolio, the equally-weighted portfolio, the entropy-weighted portfolio, and the diversity-weighted portfolio) in the presence of dividends and transaction costs is examined under different configurations involving the trading fre- quency, constituent list size, and renewing frequency. All portfolios outperform the index tracking portfolio in the absence of transaction costs. This outperformance is statistically significant for daily and weekly traded portfolios but not for monthly traded portfolios. However, when proportional transaction costs of 0.5% are imposed, most portfolios no longer outperform the market. Some exceptional cases include the entropy-weighted and the diversity-weighted portfolios under specific configurations. The only statistical significant difference appears for the relative underperformance of the equally-weighted portfolio.

Keywords: diversity-weighted portfolio; equally-weighted portfolio; functionally generated portfolio; portfolio analysis; stochastic portfolio theory; transaction cost (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2020-09-02
New Economics Papers: this item is included in nep-ias and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in SIAM Journal on Financial Mathematics, 2, September, 2020, 11(3), pp. 881–896. ISSN: 1945-497X

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