Multiperiod portfolio optimization with multiple risky assets and general transaction costs

Mei, X, DeMiguel, V and Nogales, F J (2016) Multiperiod portfolio optimization with multiple risky assets and general transaction costs. Journal of Banking and Finance, 69 (August). pp. 108-120. ISSN 0378-4266

Abstract

We analyze the optimal portfolio policy for a multiperiod mean-variance investor facing multiple risky assets in the presence of general transaction costs. For proportional transaction costs, we give a closed-form expression for a no-trade region, shaped as a multi-dimensional parallelogram, and show how the optimal portfolio policy can be efficiently computed for many risky assets by solving a single quadratic program. For market impact costs, we show that at each period it is optimal to trade to the boundary of a state-dependent rebalancing region. Finally, we show empirically that the losses associated with ignoring transaction costs and behaving myopically may be large.