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Optimizing Transition Strategies for Small to Medium Sized Portfolios

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  • Nakul Upadhya
  • Alexandre Granzer-Guay

Abstract

This work discusses the benefits of constrained portfolio turnover strategies for small to medium-sized portfolios. We propose a dynamic multi-period model that aims to minimize transaction costs and maximize terminal wealth levels whilst adhering to strict portfolio turnover constraints. Our results demonstrate that using our framework in combination with a reasonable forecast, can lead to higher portfolio values and lower transaction costs on average when compared to a naive, single-period model. Such results were maintained given different problem cases, such as, trading horizon, assets under management, wealth levels, etc. In addition, the proposed model lends itself to a reformulation that makes use of the column generation algorithm which can be strategically leveraged to reduce complexity and solving times.

Suggested Citation

  • Nakul Upadhya & Alexandre Granzer-Guay, 2024. "Optimizing Transition Strategies for Small to Medium Sized Portfolios," Papers 2401.13126, arXiv.org, revised Jan 2024.
    • Handle: RePEc:arx:papers:2401.13126
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    References listed on IDEAS

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    1. Keith V. Smith, 1967. "A Transition Model For Portfolio Revision," Journal of Finance, American Finance Association, vol. 22(3), pages 425-439, September.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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