Dynamic Trading With Transaction Costs
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Author | : Nicolae Garleanu |
Publisher | : |
Total Pages | : 0 |
Release | : 2009 |
Genre | : Portfolio management |
ISBN | : |
Abstract: This paper derives in closed form the optimal dynamic portfolio policy when trading is costly and security returns are predictable by signals with different mean-reversion speeds. The optimal updated portfolio is a linear combination of the existing portfolio, the optimal portfolio absent trading costs, and the optimal portfolio based on future expected returns and transaction costs. Predictors with slower mean reversion (alpha decay) get more weight since they lead to a favorable positioning both now and in the future. We implement the optimal policy for commodity futures and show that the resulting portfolio has superior returns net of trading costs relative to more naive benchmarks. Finally, we derive natural equilibrium implications, including that demand shocks with faster mean reversion command a higher return premium
Author | : Alexander J. T. Rathenborg |
Publisher | : |
Total Pages | : 117 |
Release | : 2015 |
Genre | : |
ISBN | : |
Author | : Jakob Brix |
Publisher | : |
Total Pages | : 32 |
Release | : 2014 |
Genre | : |
ISBN | : |
Author | : James A. Sefton |
Publisher | : |
Total Pages | : 45 |
Release | : 2015 |
Genre | : |
ISBN | : |
We derive an explicit solution to a continuous time dynamic portfolio problem assuming investors maximize their welfare from a consumption stream in an incomplete market where returns to the securities are predictable but costly to trade. The solution is phrased in terms of a risk-sensitive Riccati equation. We show that the optimal trading strategy is to target a portfolio that is the optimal solution to a frictionless (or 'no-cost') dynamic portfolio problem but where the returns to the assets have been adjusted for costs; that is they have been expressed on a net rather than gross basis. The legacy portfolio (the inherited undesirable positions) are then traded away in line with a backward-looking optimal execution problem. We show that the utility gradient is a stochastic discount factor that prices the assets net returns. Thus we are able to generalise some of the results of the martingale approach to dynamic portfolio theory to market with frictions.
Author | : Xiaotie Deng |
Publisher | : London : Department of Economics, University of Western Ontario |
Total Pages | : 24 |
Release | : 2000 |
Genre | : Arbitrage |
ISBN | : |
Author | : Nicolae Gârleanu |
Publisher | : |
Total Pages | : 45 |
Release | : 2009 |
Genre | : |
ISBN | : |
Author | : Tim Leung (Professor of industrial engineering) |
Publisher | : World Scientific |
Total Pages | : 221 |
Release | : 2015-11-26 |
Genre | : Business & Economics |
ISBN | : 9814725927 |
"Optimal Mean Reversion Trading: Mathematical Analysis and Practical Applications provides a systematic study to the practical problem of optimal trading in the presence of mean-reverting price dynamics. It is self-contained and organized in its presentation, and provides rigorous mathematical analysis as well as computational methods for trading ETFs, options, futures on commodities or volatility indices, and credit risk derivatives. This book offers a unique financial engineering approach that combines novel analytical methodologies and applications to a wide array of real-world examples. It extracts the mathematical problems from various trading approaches and scenarios, but also addresses the practical aspects of trading problems, such as model estimation, risk premium, risk constraints, and transaction costs. The explanations in the book are detailed enough to capture the interest of the curious student or researcher, and complete enough to give the necessary background material for further exploration into the subject and related literature. This book will be a useful tool for anyone interested in financial engineering, particularly algorithmic trading and commodity trading, and would like to understand the mathematically optimal strategies in different market environments."--
Author | : John Y. Campbell |
Publisher | : OUP Oxford |
Total Pages | : 272 |
Release | : 2002-01-03 |
Genre | : Business & Economics |
ISBN | : 019160691X |
Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.
Author | : Mr.Charles Frederick Kramer |
Publisher | : International Monetary Fund |
Total Pages | : 36 |
Release | : 1994-10-01 |
Genre | : Business & Economics |
ISBN | : 1451854870 |
The relationship of stock returns and trading volume is the focus of much recent interest. I examine an economic model of a rational trader who operates in a market with transactions costs and noise trading. The level of trading affects the rational trader’s marginal cost of transacting; as a result, trading volume is a source of risk. This engenders an equilibrium relationship between returns and volume. The model also provides a simple way to scrutinize this relationship empirically. Empirical evidence supports the implications of the model.
Author | : Stephen Boyd |
Publisher | : |
Total Pages | : 92 |
Release | : 2017-07-28 |
Genre | : Mathematics |
ISBN | : 9781680833287 |
This monograph collects in one place the basic definitions, a careful description of the model, and discussion of how convex optimization can be used in multi-period trading, all in a common notation and framework.