Please use this identifier to cite or link to this item: http://scholarbank.nus.edu.sg/handle/10635/38381
Title: MULTIPERIOD PORTFOLIO OPTIMIZATION WITH TRANSACTION COSTS
Authors: FU YINGHUI
Keywords: mean-variance, portfolio optimization, transaction costs, dynamic programming, investment analysis, approximation method
Issue Date: 16-Aug-2012
Source: FU YINGHUI (2012-08-16). MULTIPERIOD PORTFOLIO OPTIMIZATION WITH TRANSACTION COSTS. ScholarBank@NUS Repository.
Abstract: In this thesis, we study a multiperiod mean-variance portfolio optimization problem in the presence of proportional transaction costs. Many existing studies have shown that transaction costs can significantly affect investors' behaviour. However, even under simple assumptions, closed-form solutions are not easy to obtain when transaction costs are considered. As a result, they are often ignored in multiperiod portfolio analysis, which leads to suboptimal solutions. To tackle this complex problem, this thesis studies a market consisting of one risk-free and one risky asset. Whenever there is a trade after the initial asset allocation, the investor incurs a linear transaction cost. The single-period and the two-period cases are investigated before we extend the results to a longer horizon. For single-period and two-period problems, we derive the closed-form expressions of the optimal thresholds for investors to re-allocate their resources. These thresholds divide the action space into three regions. In every region, one investment strategy is recommended out of three options, namely, buy, sell and hold. Some important properties of the analytical solutions to the single-period and two-period models are identified, which shed light on solving investment problems involving more time periods. When more time periods are considered, it becomes intractable since the quadratic structure of the model cannot be retained due to the incorporation of transaction costs. Therefore, based on the features of the optimal solutions identified in single-period and two-period analyses, we develop an approximation method to obtain near optimal solutions. The approximation can work efficiently and effectively under mild assumptions. A series of numerical experiments are conducted to show that the proposed method can significantly improve the investment performance compared to the case when transaction costs are ignored. The recursive property of the proposed approximation method also makes it efficient to solve the multiperiod problem over a long planning horizon.
URI: http://scholarbank.nus.edu.sg/handle/10635/38381
Appears in Collections:Ph.D Theses (Open)

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