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Dealing with complex transaction costs in portfolio management

Author

Listed:
  • Patrizia Beraldi

    (University of Calabria)

  • Antonio Violi

    (University of Sannio
    Mediterranean University of Reggio Calabria)

  • Massimiliano Ferrara

    (Mediterranean University of Reggio Calabria)

  • Claudio Ciancio

    (Vrije Universiteit Amsterdam)

  • Bruno Antonio Pansera

    (Mediterranean University of Reggio Calabria)

Abstract

This paper deals with the problem of modelling complex transaction cost structures within portfolio management models in an efficient and effective way. We consider a general structure of transaction costs, where the applied commissions depend on the range of traded monetary amount and we use this general structure within a portfolio optimization problem with rebalancing decisions in response to new market conditions. The presence of transaction costs reduces the fund’s capital and should be properly accounted for to avoid substantial costs that impact on portfolio performance. In this paper we present a mixed integer model equipped with a specialized Branch and Bound method that exploits the specific formulation of the trading operations. Computational experiments, carried out on transaction cost structures offered by real-life traders, have shown the effectiveness of the proposed model and the computational efficiency of the solution approach.

Suggested Citation

  • Patrizia Beraldi & Antonio Violi & Massimiliano Ferrara & Claudio Ciancio & Bruno Antonio Pansera, 2021. "Dealing with complex transaction costs in portfolio management," Annals of Operations Research, Springer, vol. 299(1), pages 7-22, April.
    • Handle: RePEc:spr:annopr:v:299:y:2021:i:1:d:10.1007_s10479-019-03210-5
    DOI: 10.1007/s10479-019-03210-5
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    References listed on IDEAS

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    1. 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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    5. Mansini, Renata & Ogryczak, Wlodzimierz & Speranza, M. Grazia, 2014. "Twenty years of linear programming based portfolio optimization," European Journal of Operational Research, Elsevier, vol. 234(2), pages 518-535.
    6. Guastaroba, G. & Speranza, M.G., 2012. "Kernel Search: An application to the index tracking problem," European Journal of Operational Research, Elsevier, vol. 217(1), pages 54-68.
    7. Philipp Baumann & Norbert Trautmann, 2013. "Portfolio-optimization models for small investors," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 77(3), pages 345-356, June.
    8. 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.
    9. Kolm, Petter N. & Tütüncü, Reha & Fabozzi, Frank J., 2014. "60 Years of portfolio optimization: Practical challenges and current trends," European Journal of Operational Research, Elsevier, vol. 234(2), pages 356-371.
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