Portfolio optimization under D.C. transaction costs and minimal transaction unit constraints

This paper addresses itself to a portfolio optimization problem under nonconvex transaction costs and minimal transaction unit constraints. Associated with portfolio construction is a fee for purchasing assets. Unit transaction fee is larger when the amount of transaction is smaller. Hence the trans...

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Vydáno v:Journal of global optimization Ročník 22; číslo 1-4; s. 137 - 154
Hlavní autoři: Konno, Hiroshi, Wijayanayake, Annista
Médium: Journal Article
Jazyk:angličtina
Vydáno: Dordrecht Springer Nature B.V 01.01.2002
Témata:
Algorithms
Asset acquisitions
Costs
Expected utility
Industrial engineering
Integer programming
Linear programming
Optimization
Purchasing
Stock exchanges
ISSN:0925-5001, 1573-2916
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Shrnutí:This paper addresses itself to a portfolio optimization problem under nonconvex transaction costs and minimal transaction unit constraints. Associated with portfolio construction is a fee for purchasing assets. Unit transaction fee is larger when the amount of transaction is smaller. Hence the transaction cost is usually a concave function up to certain point. When the amount of transaction increases, the unit price of assets increases due to illiquidity/market impact effects. Hence the transaction cost becomes convex beyond certain bound. Therefore, the net expected return becomes a general d.c. function (difference of two convex functions). We will propose a branch-and-bound algorithm for the resulting d.c. maximization problem subject to a constraint on the level of risk measured in terms of the absolute deviation of the rate of return of a portfolio. Also, we will show that the minimal transaction unit constraints can be incorporated without excessively increasing the amount of computation.
Bibliografie:ObjectType-Article-1
SourceType-Scholarly Journals-1
content type line 14
ISSN:0925-5001
1573-2916
DOI:10.1023/A:1013850928936