Portfolio Revision under Mean-Variance and Mean-CVaR with Transaction Costs

• Main Authors: CHEN, Andrew, FABOZZI, Frank, Dashan HUANG
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: Portfolio revision; Transaction costs; Mean-variance; Conditional value-at-risk (CVaR); Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/4785
• Institution: Singapore Management University

The portfolio revision process usually begins with a portfolio of assets rather than cash. As a result, some assets must be liquidated to permit investment in other assets, incurring transaction costs that should be directly integrated into the portfolio optimization problem. This paper discusses and analyzes the impact of transaction costs on the optimal portfolio under mean-variance and mean-conditional value-at-risk strategies. In addition, we present some analytical solutions and empirical evidence for some special situations to understand the impact of transaction costs on the portfolio revision process.