Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint
This paper studies mean–variance portfolio selection problem subject to proportional transaction costs and no-shorting constraint. We do not impose any distributional assumptions on the asset returns. By adopting dynamic programming, duality theory, and a comparison approach, we manage to derive a s...
| Main Authors: | , |
|---|---|
| Other Authors: | |
| Format: | Journal Article |
| Language: | English |
| Published: |
2022
|
| Subjects: | |
| Online Access: | https://hdl.handle.net/10356/159367 |
| _version_ | 1826112161615708160 |
|---|---|
| author | Pun, Chi Seng Ye, Zi |
| author2 | School of Physical and Mathematical Sciences |
| author_facet | School of Physical and Mathematical Sciences Pun, Chi Seng Ye, Zi |
| author_sort | Pun, Chi Seng |
| collection | NTU |
| description | This paper studies mean–variance portfolio selection problem subject to proportional transaction costs and no-shorting constraint. We do not impose any distributional assumptions on the asset returns. By adopting dynamic programming, duality theory, and a comparison approach, we manage to derive a semi-closed form solution of the optimal dynamic investment policy with the boundaries of buying, no-transaction, selling, and liquidation regions. Numerically, we illustrate the properties of the optimal policy by depicting the corresponding efficient frontiers under different rates of transaction costs and initial wealth allocations. We find that the efficient frontier is distorted due to the transaction cost incurred. We also examine how the width of the no-transaction region varies with different transaction cost rates. Empirically, we show that our transaction-cost-aware policy outperforms the transaction-cost-unaware policy in a realistic trading environment that incurs transaction costs. |
| first_indexed | 2024-10-01T03:02:45Z |
| format | Journal Article |
| id | ntu-10356/159367 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2024-10-01T03:02:45Z |
| publishDate | 2022 |
| record_format | dspace |
| spelling | ntu-10356/1593672022-06-16T05:04:38Z Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint Pun, Chi Seng Ye, Zi School of Physical and Mathematical Sciences Science::Mathematics Portfolio Selection Proportional Transaction Costs This paper studies mean–variance portfolio selection problem subject to proportional transaction costs and no-shorting constraint. We do not impose any distributional assumptions on the asset returns. By adopting dynamic programming, duality theory, and a comparison approach, we manage to derive a semi-closed form solution of the optimal dynamic investment policy with the boundaries of buying, no-transaction, selling, and liquidation regions. Numerically, we illustrate the properties of the optimal policy by depicting the corresponding efficient frontiers under different rates of transaction costs and initial wealth allocations. We find that the efficient frontier is distorted due to the transaction cost incurred. We also examine how the width of the no-transaction region varies with different transaction cost rates. Empirically, we show that our transaction-cost-aware policy outperforms the transaction-cost-unaware policy in a realistic trading environment that incurs transaction costs. Ministry of Education (MOE) Chi Seng Pun gratefully acknowledges Ministry of Education (MOE), AcRF Tier 2 grant (Reference No: MOE2017-T2-1-044) for the funding of this research. 2022-06-16T05:04:38Z 2022-06-16T05:04:38Z 2022 Journal Article Pun, C. S. & Ye, Z. (2022). Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint. Automatica, 135, 109986-. https://dx.doi.org/10.1016/j.automatica.2021.109986 0005-1098 https://hdl.handle.net/10356/159367 10.1016/j.automatica.2021.109986 2-s2.0-85118259762 135 109986 en MOE2017-T2-1-044 Automatica © 2021 Elsevier Ltd. All rights reserved. |
| spellingShingle | Science::Mathematics Portfolio Selection Proportional Transaction Costs Pun, Chi Seng Ye, Zi Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint |
| title | Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint |
| title_full | Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint |
| title_fullStr | Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint |
| title_full_unstemmed | Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint |
| title_short | Optimal dynamic mean–variance portfolio subject to proportional transaction costs and no-shorting constraint |
| title_sort | optimal dynamic mean variance portfolio subject to proportional transaction costs and no shorting constraint |
| topic | Science::Mathematics Portfolio Selection Proportional Transaction Costs |
| url | https://hdl.handle.net/10356/159367 |
| work_keys_str_mv | AT punchiseng optimaldynamicmeanvarianceportfoliosubjecttoproportionaltransactioncostsandnoshortingconstraint AT yezi optimaldynamicmeanvarianceportfoliosubjecttoproportionaltransactioncostsandnoshortingconstraint |