The Impact of Predictability and Transaction Costs on Portfolio Choice in a Multiperiod Setting
Author | : Anthony W. Lynch |
Publisher | : |
Total Pages | : 50 |
Release | : 1997 |
Genre | : Transaction costs |
ISBN | : |
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Author | : Anthony W. Lynch |
Publisher | : |
Total Pages | : 50 |
Release | : 1997 |
Genre | : Transaction costs |
ISBN | : |
Author | : Anthony W. Lynch |
Publisher | : |
Total Pages | : 50 |
Release | : 2008 |
Genre | : |
ISBN | : |
Our paper contributes to the dynamic portfolio choice and transaction cost literatures by considering a multiperiod CRRA individual who faces transaction costs and who has access to multiple risky assets, all with predictable returns. We numerically solve the individual's multiperiod problem in the presence of transaction costs and predictability. In particular, we characterize the investor's optimal portfolio choice with proportional and fixed transaction costs, and with return predictability similar to that observed for the U.S. stock market. We also perform some comparative statics to better understand the nature of the no-trade region with more than one risky asset. Throughout our focus is on the case with two risky assets. We also perform some utility comparisons. The calibration exercise reveals some interesting results about the relative attractiveness of the three equity portfolios calibrated.
Author | : Nicolas Chapados |
Publisher | : Springer Science & Business Media |
Total Pages | : 107 |
Release | : 2011-07-12 |
Genre | : Computers |
ISBN | : 1461405777 |
This brief offers a broad, yet concise, coverage of portfolio choice, containing both application-oriented and academic results, along with abundant pointers to the literature for further study. It cuts through many strands of the subject, presenting not only the classical results from financial economics but also approaches originating from information theory, machine learning and operations research. This compact treatment of the topic will be valuable to students entering the field, as well as practitioners looking for a broad coverage of the topic.
Author | : Anthony W. Lynch |
Publisher | : |
Total Pages | : 65 |
Release | : 2008 |
Genre | : |
ISBN | : |
We consider the impact of transaction costs on the portfolio decisions of a long-lived agent with isoelastic preferences. In particular, we focus on how portfolio choice, rebalancing frequency and average cost incurred change over the lifecycle are affected by return predictability. Two types of costs are evaluated: proportional to the change in the holding of the risky asset and a fixed fraction of portfolio value. We find that realistic transaction costs can materially affect rebalancing behavior, creating no-trade regions that widen near the investor's terminal date. At the same time, realistic proportional and fixed costs have little effect on the midpoint of the no-trade region, unless liquidation costs differ across assets. Return predictability calibrated to U.S. stock returns is found to have large effects on rebalancing behavior relative to independent and identically distributed (i.i.d.) returns with the same unconditional distribution. For example, return predictability causes rebalancing frequency to increase, and cost incurred to increase by an order of magnitude, at all points in the investor's life. No-trade regions early in life are wider when returns are predictable than when they are not. Finally, we find that the nature of the return predictability, including the presence or not of return heteroscedasticity, can have large effects on rebalancing behavior.
Author | : Pierre Collin-Dufresne |
Publisher | : |
Total Pages | : 57 |
Release | : 2015 |
Genre | : |
ISBN | : |
We propose a simple approach to dynamic multi-period portfolio choice with transaction costs that is tractable in settings with a large number of securities, realistic return dynamics with multiple risk factors, many predictor variables, and stochastic volatility. We obtain a closed-form solution for an optimal trading rule when the problem is restricted to a broad class of strategies we define as 'linearity generating strategies' (LGS). When restricted to this class, the non-linear dynamic optimization problem reduces to a deterministic linear-quadratic optimization problem in the parameters of the trading strategies. We show that the LGS approach dominates several alternatives in realistic settings, and in particular when the covariance structure and transaction costs are stochastic.
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.
Author | : Huamao Wang |
Publisher | : |
Total Pages | : 480 |
Release | : 2010 |
Genre | : |
ISBN | : |
We develop and analyze a model of optimal portfolio choice with a finite time horizon T. The investor's objective is to maximize the expected utility of termi- nal wealth based on partial information generated by stock prices. Rebalancing the portfolio composed of a stock and a bank account incurs transaction costs. This thesis extends the literature by examining the joint impact of partial in- formation and transaction costs on investors' decisions and expected utilities. After estimating the uncertain drift from historical prices, an investor up- dates the estimate over [0, T] based on partial information. This investor learns about the drift with the Kalman-Bucy filter, which provides a statistically op- timal estimate. Three regions of the state space with two free boundaries char- acterize the optimal portfolio strategy. A numerical algorithm using dynamic programming and a Markov chain approximation solves the model. The ex- isting algorithm with known parameters is time consuming and liable to cause underflow or overflow of the range of values represented. We propose four im- provements to overcome the drawbacks. The algorithm with modifications can be applied to the model under partial information according to the separation principle. We define two measures to quantify the losses in utility caused by partial information and transaction costs. Four quantities are introduced to describe investors' trading behaviours. With simulations of stock prices and the drift, the comparative analysis of five market parameters reveals the properties of the model and tests the robustness of the algorithm. Compared with the investors who use erroneous estimates of the drift, the learning investor's portfolio hold- ings are close to the informed investor's portfolio holdings. The average cost per transaction to the learning investor is the lowest. This investor has these benefits because the filter reduces uncertainty. We discuss the implications for practitioners to highlight the practical contributions of this research. KEY WORDS: investment; portfolio choice; parameter uncertainty; transaction costs; dynamic programming.
Author | : Victor DeMiguel |
Publisher | : |
Total Pages | : 45 |
Release | : 2014 |
Genre | : |
ISBN | : |
We study the impact of parameter uncertainty on the expected utility of a multiperiod investor subject to quadratic transaction costs. We characterize the utility loss associated with ignoring parameter uncertainty, and show that it is equal to the product between the single-period utility loss and another term that captures the effects of the multiperiod mean-variance utility and transaction cost losses. To mitigate the impact of parameter uncertainty, we propose two multiperiod shrinkage portfolios and demonstrate with simulated and empirical datasets that they substantially outperform portfolios that ignore parameter uncertainty, transaction costs, or both.