Markowitz portfolios under transaction costs

Olivier Ledoit and Michael Wolf

No 420, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: Markowitz portfolio selection is a cornerstone in finance, in academia as well as in the industry. Most academic studies either ignore transaction costs or account for them in a way that is both unrealistic and suboptimal by (i) assuming transaction costs to be constant across stocks and (ii) ignoring them at the portfolio-selection state and simply paying them after the fact. Our paper proposes a method to fix both shortcomings. As we show, if transaction costs are accounted for (properly) at the portfolio-selection stage, net performance in terms of the Sharpe ratio often increases, in particular for high-turnover strategies.

Keywords: Covariance matrix estimation; mean-variance efficiency; multivariate GARCH; portfolio selection; transaction costs (search for similar items in EconPapers)
JEL-codes: C13 G11 (search for similar items in EconPapers)
Date: 2022-10, Revised 2024-09
New Economics Papers: this item is included in nep-fmk
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