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Portfolio revision under mean-variance and mean-CVaR with transaction costs

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  • Andrew Chen

    ()

  • Frank Fabozzi

    ()

  • Dashan Huang

    ()

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    Abstract

    The portfolio revision process usually begins with a portfolio of assets rather than cash. As a result, some assets must be liquidated to permit investment in other assets, incurring transaction costs that should be directly integrated into the portfolio optimization problem. This paper discusses and analyzes the impact of transaction costs on the optimal portfolio under mean-variance and mean-conditional value-at-risk strategies. In addition, we present some analytical solutions and empirical evidence for some special situations to understand the impact of transaction costs on the portfolio revision process. Copyright Springer Science+Business Media, LLC 2012

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    File URL: http://hdl.handle.net/10.1007/s11156-012-0292-1
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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 39 (2012)
    Issue (Month): 4 (November)
    Pages: 509-526

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    Handle: RePEc:kap:rqfnac:v:39:y:2012:i:4:p:509-526

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

    Related research

    Keywords: Portfolio revision; Transaction costs; Mean-variance; Conditional value-at-risk (CVaR); G11; C61;

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    References

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    1. John Y. Campbell & Luis M. Viceira, 1999. "Consumption And Portfolio Decisions When Expected Returns Are Time Varying," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 433-495, May.
    2. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
    3. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2007. "Mean-variance portfolio selection with `at-risk' constraints and discrete distributions," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3761-3781, December.
    4. Chen, Andrew H Y & Jen, Frank C & Zionts, Stanley, 1971. "The Optimal Portfolio Revision Policy," The Journal of Business, University of Chicago Press, vol. 44(1), pages 51-61, January.
    5. Adcock, C. J. & Meade, N., 1994. "A simple algorithm to incorporate transactions costs in quadratic optimisation," European Journal of Operational Research, Elsevier, vol. 79(1), pages 85-94, November.
    6. Mark Rubinstein, 2002. "Markowitz's "Portfolio Selection": A Fifty-Year Retrospective," Journal of Finance, American Finance Association, vol. 57(3), pages 1041-1045, 06.
    7. Elton, Edwin J & Gruber, Martin J & Padberg, Manfred W, 1976. "Simple Criteria for Optimal Portfolio Selection," Journal of Finance, American Finance Association, vol. 31(5), pages 1341-57, December.
    8. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
    9. Michael J. Best & Jaroslava Hlouskova, 2005. "An Algorithm for Portfolio Optimization with Transaction Costs," Management Science, INFORMS, vol. 51(11), pages 1676-1688, November.
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