Optimal Dynamic Mean-Variance Portfolio subject to Proportional Transaction Costs and No-shorting Constraint (with Appendix)

Automatica

18 Pages Posted: 17 Jul 2020 Last revised: 13 Sep 2021

See all articles by Chi Seng Pun

Chi Seng Pun

Nanyang Technological University (NTU) - School of Physical and Mathematical Sciences

Zi Ye

Nanyang Technological University (NTU) - School of Physical and Mathematical Sciences

Date Written: June 25, 2020

Abstract

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 nd 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.

Keywords: Portfolio selection, Discrete-time multi-period optimization, Proportional transaction costs, No-shorting constraint, Time consistency in efficiency

Suggested Citation

Pun, Chi Seng and Ye, Zi, Optimal Dynamic Mean-Variance Portfolio subject to Proportional Transaction Costs and No-shorting Constraint (with Appendix) (June 25, 2020). Automatica, Available at SSRN: https://ssrn.com/abstract=3635361 or http://dx.doi.org/10.2139/ssrn.3635361

Chi Seng Pun (Contact Author)

Nanyang Technological University (NTU) - School of Physical and Mathematical Sciences ( email )

SPMS-MAS-05-22
21 Nanyang Link
Singapore, 637371
Singapore
(+65) 6513 7468 (Phone)

HOME PAGE: http://personal.ntu.edu.sg/cspun/

Zi Ye

Nanyang Technological University (NTU) - School of Physical and Mathematical Sciences ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

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