Multiperiod Portfolio Optimization with Many Risky Assets and General Transaction Costs

48 Pages Posted: 18 Jul 2013 Last revised: 15 Jan 2014

See all articles by Victor DeMiguel

Victor DeMiguel

London Business School

Xiaoling Mei

Xiamen University-Department of Finance, School of Economics and Wang Yanan Institute for Studies in Economics (WISE)

Francisco J. Nogales

Universidad Carlos III de Madrid - Department of Statistics; Institute of Financial Big Data UC3M-BS

Date Written: January 14, 2014

Abstract

We analyze the optimal portfolio policy for a multiperiod mean-variance investor facing a large number of risky assets in the presence of general transaction cost. 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 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 utility loss associated with ignoring transaction costs may be large.

Keywords: Portfolio optimization, multiperiod utility, no-trade region, market impact.

JEL Classification: G11

Suggested Citation

DeMiguel, Victor and Mei, Xiaoling and Nogales, Francisco J., Multiperiod Portfolio Optimization with Many Risky Assets and General Transaction Costs (January 14, 2014). Available at SSRN: https://ssrn.com/abstract=2295345 or http://dx.doi.org/10.2139/ssrn.2295345

Victor DeMiguel

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Xiaoling Mei

Xiamen University-Department of Finance, School of Economics and Wang Yanan Institute for Studies in Economics (WISE) ( email )

422 Siming S Rd
Xiamen, Fujian 361005
China

Francisco J. Nogales (Contact Author)

Universidad Carlos III de Madrid - Department of Statistics ( email )

Avda. de la Universidad, 30
Leganes, Madrid 28911
Spain
+34 916248773 (Phone)

HOME PAGE: http://www.est.uc3m.es/Nogales

Institute of Financial Big Data UC3M-BS ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

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