Mean-Variance Portfolio Rebalancing with Transaction Costs

50 Pages Posted: 16 May 2019 Last revised: 9 Dec 2020

See all articles by Philip H. Dybvig

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School

Luca Pezzo

University of New Orleans

Date Written: December 8, 2020

Abstract

As in continuous time, the nontrading region (NTR) in a mean-variance model with fixed, proportional, and quadratic trading costs is a singleton only for pure quadratic costs. Utility loss from costs is approximately proportional at small cost levels, and approximately constant at large cost levels. Trading can be to the interior of the NTR (fixed costs with or without proportional costs), the exterior of the NTR (quadratic costs with or without proportional costs), or the boundary (pure proportional costs). Absent fixed costs, the NTR is a multidimensional parallelogram. An application shows how to improve on traditional symmetric futures overlay strategies.

Keywords: Transaction Costs, Mean-Variance, Optimization, Asset Allocation, Price Pressure

JEL Classification: C61, D23, G11

Suggested Citation

Dybvig, Philip H. and Pezzo, Luca, Mean-Variance Portfolio Rebalancing with Transaction Costs (December 8, 2020). Available at SSRN: https://ssrn.com/abstract=3373329 or http://dx.doi.org/10.2139/ssrn.3373329

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Luca Pezzo (Contact Author)

University of New Orleans ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

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