Download or read book Optimal Portfolio Selection for the Small Investor Considering Risk and Transaction Costs written by Rainer Baule and published by . This book was released on 2013 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: A direct application of classical portfolio selection theory is problematic for the small investor, since transaction costs in the form of bank and broker fees exist. Particularly minimum fees force the investor to choose a rather small selection of assets. This leads to an optimization problem which juxtaposes the transaction costs against the risk costs arising with portfolios consisting of only a few assets. Despite the non-convex and thus complex optimization, an algorithmic solution turns out to be very fast and precise. An empirical study shows that for smaller investment volumes, transaction costs dominate risk costs, so that optimal portfolios contain only a very small number of assets.

Download or read book Optimal Portfolio Selection with Transaction Costs and Event Risk written by Hong Liu and published by . This book was released on 2009 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: Models with event risk (the possibility of sudden large price movements) have proven important for option pricing (e.g., Bates (1996))and optimal portfolio selection (e.g., Liu, Longstaff and Pan(2003)). However, most of the existing studies ignore transaction costs which are prevalent in almost all of the financial markets. How investors should trade in the presence of event risks and transaction costs remains an important but unanswered question. In this paper, we consider the optimal trading strategy for a CRRA investor who derives utility from terminal wealth and can continuously trade in a riskless asset and a risky asset. The risky asset, whose price follows a jump diffusion, is subject to proportional transaction costs. We show that the optimal trading strategy is to maintain the fraction of wealth invested in the risky asset between two bounds. In contrast to the case without jump risk, this fraction can jump outside the bounds which implies a discrete transaction back to the closest boundary and thus a greater transaction cost payment. We characterize the value function and provide bounds on the trading boundaries. Somewhat surprisingly, we find that an increase in transaction costs may increase trading frequency. Our numerical results suggest that event risk significantly reduces stock holdings and decreases trading frequency. We also show that the boundaries are affected not only by jump sizes but also by the uncertainty about jump sizes. Furthermore, we examine how the optimal transaction boundaries vary through time for investors with deterministic horizons.

Download or read book Optimal Portfolio Selection with Transaction Costs written by N'Golo Koné and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The optimal portfolio selection problem has been and continues to be a subject of interest in finance. The main objective is to find the best way to allocate the financial resources in a set of assets available on the financial market in order to reduce the portfolio fluctuation risks and achieve high returns. Nonetheless, there has been a strong advance in the literature of the optimal allocation of financial resources since the 20th century with the proposal of several strategies for portfolio selection essentially motivated by the pioneering work of Markowitz (1952)which provides a solid basis for portfolio analysis on the financial market. This thesis, divided into three chapters, contributes to this vast literature by proposing various economic tools to improve the process of selecting portfolios on the financial market in order to help stakeholders in this market. The first chapter, a joint paper with Marine Carrasco, addresses a portfolio selection problem with trading costs on stock market. More precisely, we develop a simple GMM-based test procedure to test the significance of trading costs effect in the economy regardless of the form of the transaction cost. In fact, most of the studies in the literature about trading costs effect depend largely on the form of the frictions assumed in the model (Dumas and Luciano (1991), Lynch and Balduzzi (1999), Lynch and Balduzzi (2000), Liu and Loewenstein (2002), Liu (2004), Lesmond et al. (2004), Buss et al. (2011), Gârleanu and Pedersen (2013), Heaton and Lucas (1996)). To overcome this problem, we develop a simple test procedure which allows us to test the significance of trading costs effect on a given asset in the economy without any assumption about the form of these frictions. Our test procedure relies on the assumption that the model estimated by GMM is correctly specified. A common test used to evaluate this assumption is the standard J-test proposed by Hansen (1982). However, when the true parameter is close to the boundary of the parameter space, the standard J-test based on the chi2 critical value suffers from overrejection. To overcome this problem, we propose a two-step procedure to test overidentifying restrictions when the parameter of interest approaches the boundary of the parameter space. In an empirical analysis, we apply our test procedures to the class of anomalies used in Novy-Marx and Velikov (2016). We show that transaction costs have a significant effect on investors' behavior for most anomalies. In that case, investors significantly improve out-of-sample performance by accounting for trading costs. The second chapter addresses a multi-period portfolio selection problem when the number of assets in the financial market is large. Using an exponential utility function, the optimal solution is shown to be a function of the inverse of the covariance matrix of asset returns. Nonetheless, when the number of assets grows, this inverse becomes unreliable, yielding a selected portfolio that is far from the optimal one. We propose two solutions to this problem. First, we penalize the norm of the portfolio weights in the dynamic problem and show that the selected strategy is asymptotically efficient. However, this method partially controls the estimation error in the optimal solution because it ignores the estimation error in the expected return, which may also be important when the number of assets in the financial market increases considerably. We propose an alternative method that consists of penalizing the norm of the difference of successive portfolio weights in the dynamic problem to guarantee that the optimal portfolio composition does not fluctuate widely between periods. We show, under appropriate regularity conditions, that we better control the estimation error in the optimal portfolio with this new procedure. This second method helps investors to avoid high trading costs in the financial market by selecting stable strategies over time. Extensive simulations and empirical results confirm that our procedures considerably improve the performance of the dynamic portfolio. In the third chapter, we use various regularization (or stabilization) techniques borrowed from the literature on inverse problems to estimate the maximum diversification as defined by Choueifaty (2011). In fact, the maximum diversification portfolio depends on the vector of asset volatilities and the inverse of the covariance matrix of assets distribution. In practice, these two quantities need to be replaced by their sample counterparts. This results in estimation error which is amplified by the fact that the sample covariance matrix may be close to a singular matrix in a large financial market, yielding a selected portfolio far from the optimal one with very poor performance. To address this problem, we investigate three regularization techniques, such as the ridge, the spectral cut-off, and the Landweber-Fridman, to stabilize the inverse of the covariance matrix in the investment process. These regularization schemes involve a tuning parameter that needs to be chosen. So, we propose a data-driven method for selecting the tuning parameter in an optimal way. The resulting regularized rules are compared to several strategies such as the most diversified portfolio, the target portfolio, the global minimum variance portfolio, and the naive 1/N strategy in terms of in-sample and out-of-sample Sharpe ratio.

Download or read book Optimal Portfolio Selection with Fixed Transaction Costs in the Presence of Jumps and Random Drift written by Ajay Subramanian Aiyer and published by . This book was released on 1996 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Portfolio Selection written by Harry Markowitz and published by Yale University Press. This book was released on 2008-10-01 with total page 369 pages. Available in PDF, EPUB and Kindle. Book excerpt: Embracing finance, economics, operations research, and computers, this book applies modern techniques of analysis and computation to find combinations of securities that best meet the needs of private or institutional investors.

Download or read book Optimal Portfolio Selection with Transaction Costs written by Phelim P. Boyle and published by . This book was released on 1994 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Uncertain Portfolio Optimization written by Zhongfeng Qin and published by Springer. This book was released on 2016-09-16 with total page 200 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides a new modeling approach for portfolio optimization problems involving a lack of sufficient historical data. The content mainly reflects the author’s extensive work on uncertainty portfolio optimization in recent years. Considering security returns as different variables, the book presents a series of portfolio optimization models in the framework of credibility theory, uncertainty theory and chance theory, respectively. As such, it offers readers a comprehensive and up-to-date guide to uncertain portfolio optimization models.

Download or read book Strategic Asset Allocation written by John Y. Campbell and published by OUP Oxford. This book was released on 2002-01-03 with total page 272 pages. Available in PDF, EPUB and Kindle. Book excerpt: Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.

Download or read book Multiple Risky Assets Transaction Costs and Return Predictability written by Anthony W. Lynch and published by . This book was released on 2008 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Our paper contributes to the dynamic portfolio choice and transaction cost literatures by considering a multiperiod CRRA individual who faces transaction costs and who has access to multiple risky assets, all with predictable returns. We numerically solve the individual's multiperiod problem in the presence of transaction costs and predictability. In particular, we characterize the investor's optimal portfolio choice with proportional and fixed transaction costs, and with return predictability similar to that observed for the U.S. stock market. We also perform some comparative statics to better understand the nature of the no-trade region with more than one risky asset. Throughout our focus is on the case with two risky assets. We also perform some utility comparisons. The calibration exercise reveals some interesting results about the relative attractiveness of the three equity portfolios calibrated.

Download or read book Linear and Mixed Integer Programming for Portfolio Optimization written by Renata Mansini and published by Springer. This book was released on 2015-06-10 with total page 131 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book presents solutions to the general problem of single period portfolio optimization. It introduces different linear models, arising from different performance measures, and the mixed integer linear models resulting from the introduction of real features. Other linear models, such as models for portfolio rebalancing and index tracking, are also covered. The book discusses computational issues and provides a theoretical framework, including the concepts of risk-averse preferences, stochastic dominance and coherent risk measures. The material is presented in a style that requires no background in finance or in portfolio optimization; some experience in linear and mixed integer models, however, is required. The book is thoroughly didactic, supplementing the concepts with comments and illustrative examples.

Download or read book A Simple Algorithm for Optimal Portfolio Selection with Fixed Transaction Costs written by Nitin Ratilal Patel and published by . This book was released on 1979 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Quantitative Financial Risk Management written by Constantin Zopounidis and published by John Wiley & Sons. This book was released on 2015-05-18 with total page 455 pages. Available in PDF, EPUB and Kindle. Book excerpt: A Comprehensive Guide to Quantitative Financial Risk Management Written by an international team of experts in the field, Quantitative Financial Risk Management: Theory and Practice provides an invaluable guide to the most recent and innovative research on the topics of financial risk management, portfolio management, credit risk modeling, and worldwide financial markets. This comprehensive text reviews the tools and concepts of financial management that draw on the practices of economics, accounting, statistics, econometrics, mathematics, stochastic processes, and computer science and technology. Using the information found in Quantitative Financial Risk Management can help professionals to better manage, monitor, and measure risk, especially in today's uncertain world of globalization, market volatility, and geo-political crisis. Quantitative Financial Risk Management delivers the information, tools, techniques, and most current research in the critical field of risk management. This text offers an essential guide for quantitative analysts, financial professionals, and academic scholars.

Download or read book Optimal Portfolio Selection with Transaction Costs a Model with Non constant Transaction Cost Rate written by Andriy Demchuk and published by . This book was released on 1999 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book A Unified Approach to Portfolio Optimization with Linear Transaction Costs written by Valeriy Zakamulin and published by . This book was released on 2010 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we study the continuous time optimal portfolio selection problem for an investor with a finite horizon who maximizes expected utility of terminal wealth and faces transaction costs in the capital market. It is well known that, depending on a particular structure of transaction costs, such a problem is formulated and solved within either stochastic singular control or stochastic impulse control framework. In this paper we propose a unified framework, which generalizes the contemporary approaches and is capable to deal with any problem where transaction costs are a linear/piecewise-linear function of the volume of trade. We also discuss some methods for solving numerically the problem within our unified framework.

Download or read book Overcoming Transaction Costs of Portfolio Selection written by Richard Whale and published by . This book was released on 2021 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Portfolio and Investment Selection written by Haim Levy and published by Prentice Hall. This book was released on 1984 with total page 776 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Optimal Portfolio Selection written by Ping Cheng and published by . This book was released on 2017 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: Modern Portfolio Theory is a single-period model developed for the efficient securities market, in which asset prices are implicitly assumed to follow a random walk. It is widely agreed that real estate does not fit into the efficient market paradigm; however, mixed-asset portfolio analysis continues to rely on Modern Portfolio Theory. This paper proposes an alternative model that extends the Modern Portfolio Theory to accommodate multi-period utility maximization as well as the unique characteristics of real estate such as liquidity risk, horizon-dependence of real estate returns and high transaction cost. The model is easy to be implemented. Using real world data, it demonstrates the optimal allocation to real estate in the mixed-asset portfolio is quite in line with the reality of institutional portfolios.