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A Note on Portfolio Optimization with Quadratic Transaction Costs

Author

Listed:
  • Pierre Chen
  • Edmond Lezmi
  • Thierry Roncalli
  • Jiali Xu

Abstract

In this short note, we consider mean-variance optimized portfolios with transaction costs. We show that introducing quadratic transaction costs makes the optimization problem more difficult than using linear transaction costs. The reason lies in the specification of the budget constraint, which is no longer linear. We provide numerical algorithms for solving this issue and illustrate how transaction costs may considerably impact the expected returns of optimized portfolios.

Suggested Citation

  • Pierre Chen & Edmond Lezmi & Thierry Roncalli & Jiali Xu, 2020. "A Note on Portfolio Optimization with Quadratic Transaction Costs," Papers 2001.01612, arXiv.org.
    • Handle: RePEc:arx:papers:2001.01612
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    File URL: http://arxiv.org/pdf/2001.01612
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    References listed on IDEAS

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    1. Roncalli, Thierry, 2013. "Introduction to Risk Parity and Budgeting," MPRA Paper 47679, University Library of Munich, Germany.
    2. Sarah Perrin & Thierry Roncalli, 2019. "Machine Learning Optimization Algorithms & Portfolio Allocation," Papers 1909.10233, arXiv.org.
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    Cited by:

    1. Tian Zhu & Wei Zhu, 2022. "Quantitative Trading through Random Perturbation Q-Network with Nonlinear Transaction Costs," Stats, MDPI, vol. 5(2), pages 1-15, June.

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