IDEAS home Printed from https://ideas.repec.org/a/spr/mathme/v81y2015i3p337-359.html
   My bibliography  Save this article

Periodic portfolio revision with transaction costs

Author

Listed:
  • Krastyu Georgiev
  • Young Kim
  • Stoyan Stoyanov

Abstract

In this paper we consider the impact of transaction costs on the periodic portfolio revision. We offer a statistical model for simulation of daily returns which can explain the empirical behavior of equity returns. The model is based on ARMA–GARCH processes, principal component analysis, classical tempered stable distribution, and skewed $$t$$ t copula. The main contribution of this paper is the application of a new approach for modelling transaction costs using daily returns by estimating an optimal portfolio with an arbitrary length for the holding period. Moreover, we compare the portfolio selection problem solved with and without transaction costs by applying different risk and performance measures on simulated returns, taking into account their Sharpe ratio and stable tail-adjusted return ratio. The experimental analysis suggests that the incorporation of transaction costs into an optimal portfolio framework leads to remarkable reduction of the transaction costs and stabilization of the optimal portfolio strategy. However, ignoring transaction costs does not always result in a less efficient portfolio. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Krastyu Georgiev & Young Kim & Stoyan Stoyanov, 2015. "Periodic portfolio revision with transaction costs," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 81(3), pages 337-359, June.
    • Handle: RePEc:spr:mathme:v:81:y:2015:i:3:p:337-359
    DOI: 10.1007/s00186-015-0500-6
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s00186-015-0500-6
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s00186-015-0500-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kim, Young Shin & Rachev, Svetlozar T. & Bianchi, Michele Leonardo & Mitov, Ivan & Fabozzi, Frank J., 2011. "Time series analysis for financial market meltdowns," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1879-1891, August.
    2. Andrew J. Morton & Stanley R. Pliska, 1995. "Optimal Portfolio Management With Fixed Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 5(4), pages 337-356, October.
    3. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    4. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    5. Miguel Lobo & Maryam Fazel & Stephen Boyd, 2007. "Portfolio optimization with linear and fixed transaction costs," Annals of Operations Research, Springer, vol. 152(1), pages 341-365, July.
    6. Andriy Demchuk, 2002. "Portfolio Optimization with Concave Transaction Costs," FAME Research Paper Series rp103, International Center for Financial Asset Management and Engineering.
    7. Carlo Acerbi & Dirk Tasche, 2001. "Expected Shortfall: a natural coherent alternative to Value at Risk," Papers cond-mat/0105191, arXiv.org.
    8. Peter Carr & Helyette Geman, 2002. "The Fine Structure of Asset Returns: An Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 75(2), pages 305-332, April.
    9. Benoit Mandelbrot, 1967. "The Variation of Some Other Speculative Prices," The Journal of Business, University of Chicago Press, vol. 40, pages 393-393.
    10. S. V. Stoyanov & S. T. Rachev & F. J. Fabozzi, 2007. "Optimal Financial Portfolios," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(5), pages 401-436.
    11. George M. Constantinides, 2005. "Capital Market Equilibrium with Transaction Costs," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 7, pages 207-227, World Scientific Publishing Co. Pte. Ltd..
    12. M. H. A. Davis & A. R. Norman, 1990. "Portfolio Selection with Transaction Costs," Mathematics of Operations Research, INFORMS, vol. 15(4), pages 676-713, November.
    13. George M. Constantinides, 1979. "Multiperiod Consumption and Investment Behavior with Convex Transactions Costs," Management Science, INFORMS, vol. 25(11), pages 1127-1137, November.
    14. C. Atkinson & P. Wilmott, 1995. "Portfolio Management With Transaction Costs: An Asymptotic Analysis Of The Morton And Pliska Model," Mathematical Finance, Wiley Blackwell, vol. 5(4), pages 357-367, October.
    15. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    16. Gonzalez-Rivera, Gloria & Lee, Tae-Hwy & Yoldas, Emre, 2007. "Optimality of the RiskMetrics VaR model," Finance Research Letters, Elsevier, vol. 4(3), pages 137-145, September.
    17. Bogdan ZUGRAVU & Dumitru Cristian OANEA & Victoria Gabriela ANGHELACHE, 2013. "Analysis Based on the Risk Metrics Model," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 61(2), pages 145-154, May.
    18. MOSSIN, Jan, 1968. "Optimal multiperiod portfolio policies," LIDAM Reprints CORE 19, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    19. 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.
    20. John M. R. Chalmers & Roger M. Edelen & Gregory B. Kadlec, 2001. "On the Perils of Financial Intermediaries Setting Security Prices: The Mutual Fund Wild Card Option," Journal of Finance, American Finance Association, vol. 56(6), pages 2209-2236, December.
    21. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
    22. Gerard Gennotte & Alan Jung, 1994. "Investment Strategies under Transaction Costs: The Finite Horizon Case," Management Science, INFORMS, vol. 40(3), pages 385-404, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Noureddine Kouaissah & Amin Hocine, 2021. "Forecasting systemic risk in portfolio selection: The role of technical trading rules," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(4), pages 708-729, July.
    2. Gong, Xiaoli & Zhuang, Xintian, 2017. "Measuring financial risk and portfolio reversion with time changed tempered stable Lévy processes," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 148-159.
    3. Kouaissah, Noureddine, 2021. "Using multivariate stochastic dominance to enhance portfolio selection and warn of financial crises," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 480-493.
    4. Takuji Matsumoto & Yuji Yamada, 2023. "Improving the Efficiency of Hedge Trading Using Higher-Order Standardized Weather Derivatives for Wind Power," Energies, MDPI, vol. 16(7), pages 1-22, March.
    5. Jaehyung Choi & Hyangju Kim & Young Shin Kim, 2021. "Diversified reward-risk parity in portfolio construction," Papers 2106.09055, arXiv.org, revised Sep 2022.
    6. Young Shin Kim & Hyangju Kim & Jaehyung Choi, 2023. "Deep Calibration With Artificial Neural Network: A Performance Comparison on Option Pricing Models," Papers 2303.08760, arXiv.org.
    7. Sergio Ortobelli & Noureddine Kouaissah & Tomáš Tichý, 2019. "On the use of conditional expectation in portfolio selection problems," Annals of Operations Research, Springer, vol. 274(1), pages 501-530, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:dau:papers:123456789/5374 is not listed on IDEAS
    2. Changhui Choi & Bong-Gyu Jang & Changki Kim & Sang-youn Roh, 2016. "Net Contribution, Liquidity, and Optimal Pension Management," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(4), pages 913-948, December.
    3. 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.
    4. Ying Fu & Kien Ng & Boray Huang & Huei Huang, 2015. "Portfolio optimization with transaction costs: a two-period mean-variance model," Annals of Operations Research, Springer, vol. 233(1), pages 135-156, October.
    5. Areski Cousin & Jérôme Lelong & Tom Picard, 2023. "Mean-variance dynamic portfolio allocation with transaction costs: a Wiener chaos expansion approach," Working Papers hal-04086378, HAL.
    6. Xinfu Chen & Min Dai & Wei Jiang & Cong Qin, 2022. "Asymptotic analysis of long‐term investment with two illiquid and correlated assets," Mathematical Finance, Wiley Blackwell, vol. 32(4), pages 1133-1169, October.
    7. Dai, Min & Wang, Hefei & Yang, Zhou, 2012. "Leverage management in a bull–bear switching market," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1585-1599.
    8. Davi Valladão & Thuener Silva & Marcus Poggi, 2019. "Time-consistent risk-constrained dynamic portfolio optimization with transactional costs and time-dependent returns," Annals of Operations Research, Springer, vol. 282(1), pages 379-405, November.
    9. Leal, Marina & Ponce, Diego & Puerto, Justo, 2020. "Portfolio problems with two levels decision-makers: Optimal portfolio selection with pricing decisions on transaction costs," European Journal of Operational Research, Elsevier, vol. 284(2), pages 712-727.
    10. Albert Altarovici & Max Reppen & H. Mete Soner, 2016. "Optimal Consumption and Investment with Fixed and Proportional Transaction Costs," Papers 1610.03958, arXiv.org.
    11. Hung-Hsi Huang & David Jou, 2009. "Multiperiod dynamic investment for a generalized situation," Applied Financial Economics, Taylor & Francis Journals, vol. 19(21), pages 1761-1766.
    12. Yao, Haixiang & Li, Danping & Wu, Huiling, 2022. "Dynamic trading with uncertain exit time and transaction costs in a general Markov market," International Review of Financial Analysis, Elsevier, vol. 84(C).
    13. Yaroslav Melnyk & Frank Thomas Seifried, 2018. "Small†cost asymptotics for long†term growth rates in incomplete markets," Mathematical Finance, Wiley Blackwell, vol. 28(2), pages 668-711, April.
    14. Yongyang Cai & Kenneth L. Judd & Rong Xu, 2013. "Numerical Solution of Dynamic Portfolio Optimization with Transaction Costs," NBER Working Papers 18709, National Bureau of Economic Research, Inc.
    15. Stylianos Perrakis, 2022. "From innovation to obfuscation: continuous time finance fifty years later," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(3), pages 369-401, September.
    16. George M. Constantinides & Michal Czerwonko & Stylianos Perrakis, 2020. "Mispriced index option portfolios," Financial Management, Financial Management Association International, vol. 49(2), pages 297-330, June.
    17. Frank Milne, 2008. "Credit Crises, Risk Management Systems and Liquidity Modelling," Working Papers 1, John Deutsch Institute for the Study of Economic Policy.
    18. Damgaard, Anders, 2003. "Utility based option evaluation with proportional transaction costs," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 667-700, February.
    19. Yu, Edison G., 2018. "Dynamic market participation and endogenous information aggregation," Journal of Economic Theory, Elsevier, vol. 175(C), pages 491-517.
    20. Michal Czerwonko & Stylianos Perrakis, 2016. "Portfolio Selection with Transaction Costs and Jump-Diffusion Asset Dynamics I: A Numerical Solution," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 1-23, December.
    21. H. Fink & S. Geissel & J. Sass & F. T. Seifried, 2019. "Implied risk aversion: an alternative rating system for retail structured products," Review of Derivatives Research, Springer, vol. 22(3), pages 357-387, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:mathme:v:81:y:2015:i:3:p:337-359. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.