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Markowitz portfolios under transaction costs

Author

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  • Ledoit, Olivier
  • Wolf, Michael

Abstract

Markowitz portfolio selection is a cornerstone in finance, in academia as well as in the industry. Most academic studies either ignore transaction costs or account for them in a way that is both unrealistic and suboptimal by (i) assuming transaction costs to be constant across stocks and (ii) ignoring them at the portfolio-selection state and simply paying them after the fact. Our paper proposes a method to fix both shortcomings. As we show, if transaction costs are accounted for (properly) at the portfolio-selection stage, net performance in terms of the Sharpe ratio often increases, in particular for high-turnover strategies.

Suggested Citation

  • Ledoit, Olivier & Wolf, Michael, 2025. "Markowitz portfolios under transaction costs," The Quarterly Review of Economics and Finance, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:quaeco:v:100:y:2025:i:c:s1062976925000031
    DOI: 10.1016/j.qref.2025.101962
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    More about this item

    Keywords

    Covariance matrix estimation; Mean-variance efficiency; Multivariate GARCH; Portfolio selection; Transaction costs;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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