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Multiperiod portfolio selection with transaction and market-impact costs

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  • Miguel, Víctor de
  • Nogales, Francisco J.

Abstract

We carry out an analytical investigation on the optimal portfolio policy for a multiperiod mean-variance investor facing multiple risky assets. We consider the case with proportional, market impact, and quadratic transaction costs. For proportional transaction costs, we find that a buy-and-hold policy is optimal: if the starting portfolio is outside a parallelogram-shaped no-trade region, then trade to the boundary of the no-trade region at the first period, and hold this portfolio thereafter. For market impact costs, we show that the optimal portfolio policy at each period is to trade to the boundary of a state-dependent movement region. Moreover, we find that the movement region shrinks along the investment horizon, and as a result the investor trades throughout the entire investment horizon. Finally, we show numerically that the utility loss associated with ignoring transaction costs or investing myopically may be large

Suggested Citation

  • Miguel, Víctor de & Nogales, Francisco J., 2013. "Multiperiod portfolio selection with transaction and market-impact costs," DES - Working Papers. Statistics and Econometrics. WS ws131615, Universidad Carlos III de Madrid. Departamento de Estadística.
    • Handle: RePEc:cte:wsrepe:ws131615
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    References listed on IDEAS

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    1. George M. Constantinides, 1979. "Multiperiod Consumption and Investment Behavior with Convex Transactions Costs," Management Science, INFORMS, vol. 25(11), pages 1127-1137, November.
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    3. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472, World Scientific Publishing Co. Pte. Ltd..
    4. Jim Gatheral, 2010. "No-dynamic-arbitrage and market impact," Quantitative Finance, Taylor & Francis Journals, vol. 10(7), pages 749-759.
    5. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    6. repec:bla:jfinan:v:59:y:2004:i:1:p:289-338 is not listed on IDEAS
    7. George M. Constantinides, 2005. "Capital Market Equilibrium with Transaction Costs," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 7, pages 207-227, World Scientific Publishing Co. Pte. Ltd..
    8. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
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    Cited by:

    1. Michael Isichenko, 2021. "Costly Trading," Papers 2110.15239, arXiv.org.

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