Technical note: a robust perspective on transaction costs in portfolio optimization

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 OPEN ACCESS


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.

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Item Type: Article
Subject Areas: Management Science and Operations
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© INFORMS 2018

Date Deposited: 01 Nov 2017 17:35
Date of first compliant deposit: 01 Nov 2017
Subjects: Errors
Last Modified: 24 Mar 2024 01:42
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