Portfolio Selection with Proportional Transaction Costs and Predictability

Mei, Xiaoling; Nogales, Francisco J.

doi:10.2139/ssrn.3085466

Cited by 4 publications

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“…In this case, multiple fnancial assets, transaction costs for each rebalanced period, and the search for the prediction of returns are considered. However, this is very difcult to solve, and only some papers consider this problem [11].…”

Section: Literature Reviewmentioning

confidence: 99%

“…Te authors found suboptimal policies to get feasible solutions. Indeed, some policies that help stock trading to handle transaction costs are the "No-Trade Region Policy" and the "Rolling Optimize-and-Hold Policy" proposed by [11]. Babazadeh and Esfahanipour [16] proposed a multiperiod optimization considering the Value at Risk (VaR) as a measure of risk, generating an Average VaR model, which includes transaction costs, budget, and maximum and minimum purchases.…”

Section: Literature Reviewmentioning

confidence: 99%

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An Approach for a Multi-Period Portfolio Selection Problem by considering Transaction Costs and Prediction on the Stock Market

et al. 2023

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This paper addresses a method to solve a multi-period portfolio selection on the stock market. The portfolio problem seeks an investor to trade stocks with a finite budget and a given integer number of stocks to hold in a portfolio. The trade must be performed through a stockbroker that charges its respective transaction cost and has its minimum required trade amount. A mathematical model has been proposed to deal with the constrained problem. The objective function is to find the best risk-return rate; thus, Sharpe Ratio and Treynor Ratio are used as objective functions. The returns are the same for these ratios, but the risks are not Sharpe considering covariance and Treynor systematical risk. The returns are predicted using a Neural Net with Long-Short-Term Memory (LSTM). This neural net is compared with simple forecasting methods through Mean Absolute Percentage Error (MAPE). Computational experiments show the quality prediction performed by LSTM. The heteroskedastic risk is estimated by Generalized Autoregressive Conditional Heteroskedasticity (GARCH), adjusting the variance for every period; this risk measure is used in Sharpe Ratio. The experiment contemplates a weekly portfolio selection with 5 and 10 stocks in 122 weekly periods for each Chilean market ratio. The best portfolio is Sharpe Ratio with ten stocks, performing a 62.28% real return beating the market, represented by the Selective Stock Price Index (IPSA). Even the worst portfolio, Treynor Ratio, overcomes the IPSA cumulative yield with ten stocks.

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Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

An Approach for a Multi-Period Portfolio Selection Problem by considering Transaction Costs and Prediction on the Stock Market

et al. 2023

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“…Many studies worked on evaluation of financial performance based on the allocation of assets within portfolio of investments (Lester, 2019;Mei & Nogales, 2018;Post, Karabati & Arvanitis, 2018;Zhou, Wu & Wang, 2019). It is based on several assumptions regarding investor aversion, rationality and preference, that investors consider each alternative as being represented by a expected income on investment over portfolio allocation period.…”

Section: Portfolio Allocation and Financial Performancementioning

confidence: 99%

Portfolio Allocation and Financial Performance of Insurance Industry in Nigeria

Olusegun¹,

Omotayo²

2022

IJEFM

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This paper investigated the connection between portfolio allocation and financial performance of insurance industry in Nigeria. The data was obtained from secondary sources and estimated with autoregressive distributed lag (ARDL). The study discovered a long-run relationship between portfolio allocation to cash and equivalents, financial assets, reinsurance assets, investment properties, other receivables and prepayments, property and equipment and financial performance proxied by growth in gross premium income (GPI). Further research reveals that allocation to in cash and equivalents, other receivables and prepayments and properties and equipment had an insignificant negative effect on GPI. Furthermore, the study discovered that investment in financial assets, reinsurance assets and investment properties had positive statistically significant relationship with GPI. This result implies that insurance companies’ investment in financial assets, reinsurance assets, investment properties is relativ ely high and do have strong correlation with financial performance. Hence, portfolio management in insurance industry plays a crucial role in finance. Policy should be geared towards purchase of valueadding property and equipment, purchase of intangibles, efficient utilization of proceeds from sale of property and equipment and retention of cash and cash equivalents for prompt payment of claims.

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“…Transaction cost is an important issue in practical implementations (Mei and Nogales, 2018;Mei et al, 2016). In Table 6, we present results for the Markowitz mean-variance efficient portfolios constructed based on the ROE signal, when the transaction cost is considered.…”

Section: Transaction Costmentioning

confidence: 99%

Risk Reduction and Efficiency Increase in Large Portfolios: Leverage and Shrinkage

2019

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We investigate the effects of constraining leverage and shrinking covariance matrix in constructing large portfolios, both theoretically and empirically. Considering a wide variety of setups that involve conditioning or not conditioning the covariance matrix estimator on the recent past (multivariate GARCH), smaller vs. larger universe of stocks, alternative portfolio formation objectives (Global Minimum Variance vs. exposure to profitable factors), and various transaction cost assumptions, we find that a judiciously-chosen shrinkage method always outperforms an arbitrarily-determined leverage constraint. By extending the mathematical connection between leverage and shrinkage from static to dynamic, we provide a new theoretical explanation for our finding from the perspective of degrees of freedom. In addition, both simulation and empirical analysis show that the DCC-NL estimator results in risk reduction and efficiency increase in large portfolios as long as a small amount of leverage is allowed, whereas tightening the leverage constraint often hurts a DCC-NL portfolio.

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Portfolio Selection with Proportional Transaction Costs and Predictability

Cited by 4 publications

References 0 publications

An Approach for a Multi-Period Portfolio Selection Problem by considering Transaction Costs and Prediction on the Stock Market

An Approach for a Multi-Period Portfolio Selection Problem by considering Transaction Costs and Prediction on the Stock Market

Portfolio Allocation and Financial Performance of Insurance Industry in Nigeria

Risk Reduction and Efficiency Increase in Large Portfolios: Leverage and Shrinkage

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