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Impact of proportional transaction costs on systematically generated portfolios

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  • Ruf, Johannes
  • Xie, Kangjianan

Abstract

The effect of proportional transaction costs on systematically generated portfolios is studied em- pirically. The performance of several portfolios (the index tracking portfolio, the equally-weighted portfolio, the entropy-weighted portfolio, and the diversity-weighted portfolio) in the presence of dividends and transaction costs is examined under different configurations involving the trading fre- quency, constituent list size, and renewing frequency. All portfolios outperform the index tracking portfolio in the absence of transaction costs. This outperformance is statistically significant for daily and weekly traded portfolios but not for monthly traded portfolios. However, when proportional transaction costs of 0.5% are imposed, most portfolios no longer outperform the market. Some exceptional cases include the entropy-weighted and the diversity-weighted portfolios under specific configurations. The only statistical significant difference appears for the relative underperformance of the equally-weighted portfolio.

Suggested Citation

  • Ruf, Johannes & Xie, Kangjianan, 2020. "Impact of proportional transaction costs on systematically generated portfolios," LSE Research Online Documents on Economics 104696, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:104696
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    File URL: http://eprints.lse.ac.uk/104696/
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    References listed on IDEAS

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    Cited by:

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    5. Christa Cuchiero & Janka Moller, 2023. "Signature Methods in Stochastic Portfolio Theory," Papers 2310.02322, arXiv.org, revised Oct 2024.

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    More about this item

    Keywords

    diversity-weighted portfolio; equally-weighted portfolio; functionally generated portfolio; portfolio analysis; stochastic portfolio theory; transaction cost;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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