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An Algorithm for Portfolio Optimization with Variable Transaction Costs, Part 2: Computational Analysis

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  • M. J. Best

    (University of Waterloo)

  • J. Hlouskova

    (Institute for Advanced Studies)

Abstract

In Part 1 of this paper, we introduced a (2K+1)n-dimensional portfolio optimization problem with variable transaction costs taken into account. We presented a method for solving the (2K+1)n-dimensional problem by solving a sequence of n-dimensional optimization problems accounting for the transaction costs implicitly rather than explicitly. In Part 2, we propose a degeneracy resolving rule, present computational results comparing our method with the interior-point optimizer of Mosek, well known for its speed and efficient use of sparsity, and also address the efficiency of the new method.

Suggested Citation

  • M. J. Best & J. Hlouskova, 2007. "An Algorithm for Portfolio Optimization with Variable Transaction Costs, Part 2: Computational Analysis," Journal of Optimization Theory and Applications, Springer, vol. 135(3), pages 531-547, December.
    • Handle: RePEc:spr:joptap:v:135:y:2007:i:3:d:10.1007_s10957-007-9249-2
    DOI: 10.1007/s10957-007-9249-2
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    References listed on IDEAS

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    1. De Panne, C & Whinston, Andrew, 1969. "The Symmetric Formulation of the Simplex Method for Quadratic Programming," Econometrica, Econometric Society, vol. 37(3), pages 507-527, July.
    2. Renato D. C. Monteiro & Ilan Adler & Mauricio G. C. Resende, 1990. "A Polynomial-Time Primal-Dual Affine Scaling Algorithm for Linear and Convex Quadratic Programming and Its Power Series Extension," Mathematics of Operations Research, INFORMS, vol. 15(2), pages 191-214, May.
    3. Best, Michael J & Grauer, Robert R, 1985. "Capital Asset Pricing Compatible with Observed Market Value Weights," Journal of Finance, American Finance Association, vol. 40(1), pages 85-103, March.
    4. 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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    Cited by:

    1. Areski Cousin & J'er^ome Lelong & Tom Picard, 2023. "Mean-variance dynamic portfolio allocation with transaction costs: a Wiener chaos expansion approach," Papers 2305.16152, arXiv.org, revised Jun 2023.
    2. repec:hal:wpaper:hal-04086378 is not listed on IDEAS
    3. Tiago P. Filomena & Miguel A. Lejeune, 2014. "Warm-Start Heuristic for Stochastic Portfolio Optimization with Fixed and Proportional Transaction Costs," Journal of Optimization Theory and Applications, Springer, vol. 161(1), pages 308-329, April.
    4. Jiuping Xu & Xiaoyang Zhou & Steven Li, 2011. "A Class of Chance Constrained Multi-objective Portfolio Selection Model Under Fuzzy Random Environment," Journal of Optimization Theory and Applications, Springer, vol. 150(3), pages 530-552, September.
    5. Woodside-Oriakhi, M. & Lucas, C. & Beasley, J.E., 2013. "Portfolio rebalancing with an investment horizon and transaction costs," Omega, Elsevier, vol. 41(2), pages 406-420.
    6. Michael J. Best & Xili Zhang, 2011. "Degeneracy Resolution for Bilinear Utility Functions," Journal of Optimization Theory and Applications, Springer, vol. 150(3), pages 615-634, September.

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