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Discrete Portfolio Adjustment with Fixed Transaction Costs

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  • Linus Wilson

Abstract

This paper presents a closed-form solution to the portfolio adjustment problem in discrete time when an investor faces fixed transaction costs. This transaction cost model assumes a mean-variance investor who wants to adjust her holdings of a risky and risk-free asset. It is shown how this model can be calibrated to be used with a variety of risk models such as life cycle portfolio weights and value at risk (VaR) models. The decision problem can easily be inputted into and calculated in Excel. This paper finds that investors facing lower fixed transaction costs, with higher account balances, and with a greater mismatch between their desired and current allocations will be more eager to rebalance.

Suggested Citation

  • Linus Wilson, 2016. "Discrete Portfolio Adjustment with Fixed Transaction Costs," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 8(2), pages 055-060, December.
    • Handle: RePEc:rfb:journl:v:08:y:2016:i:2:p:055-060
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    References listed on IDEAS

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    1. Maxime Bonelli & Mireille Bossy, 2017. "Portfolio Management with Drawdown Constraint: An Analysis of Optimal Investment," Working Papers hal-02282162, HAL.
    2. Vladimir Cherny & Jan Obłój, 2013. "Portfolio optimisation under non-linear drawdown constraints in a semimartingale financial model," Finance and Stochastics, Springer, vol. 17(4), pages 771-800, October.
    3. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 261-292.
    4. Zabel, Edward, 1973. "Consumer Choice, Portfolio Decisions, and Transaction Costs," Econometrica, Econometric Society, vol. 41(2), pages 321-335, March.
    5. Vladimir Cherny & Jan Obloj, 2011. "Portfolio optimisation under non-linear drawdown constraints in a semimartingale financial model," Papers 1110.6289, arXiv.org, revised Apr 2013.
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