Multiperiod Portfolio Optimization with Many Risky Assets and General Transaction Costs
48 Pages Posted: 18 Jul 2013 Last revised: 15 Jan 2014
Date Written: January 14, 2014
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: Suggested Citation