Olivares-Nadal, A V and DeMiguel, V (2018) Technical note: a robust perspective on transaction costs in portfolio optimization. Operations Research, 66 (3). pp. 733-739. ISSN 0030-364X
Abstract
We prove that the portfolio problem with transaction costs is equivalent to three different problems designed to alleviate the impact of estimation error: a robust portfolio optimization problem, a regularized regression problem, and a Bayesian portfolio problem. Motivated by these results, we propose a data-driven approach to portfolio optimization that tackles transaction costs and estimation error simultaneously by treating the transaction costs as a regularization term to be calibrated. Our empirical results demonstrate that the data-driven portfolios perform favorably because they strike an optimal trade-off between rebalancing the portfolio to capture the information in recent historical return data, and avoiding the large transaction costs
and impact of estimation error associated with excessive trading.
More Details
Item Type: | Article |
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Subject Areas: | Management Science and Operations |
Additional Information: |
© INFORMS 2018 |
Date Deposited: | 01 Nov 2017 17:35 |
Date of first compliant deposit: | 01 Nov 2017 |
Subjects: |
Errors Estimation |
Last Modified: | 28 Sep 2024 00:48 |
URI: | https://lbsresearch.london.edu/id/eprint/920 |