Large-scale portfolio allocation under transaction costs and model uncertainty

Nikolaus Hautsch*, Stefan Voigt

*Corresponding author af dette arbejde

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

22 Citationer (Scopus)

Abstract

We theoretically and empirically study portfolio optimization under transaction costs and establish a link between turnover penalization and covariance shrinkage with the penalization governed by transaction costs. We show how the ex ante incorporation of transaction costs shifts optimal portfolios towards regularized versions of efficient allocations. The regulatory effect of transaction costs is studied in an econometric setting incorporating parameter uncertainty and optimally combining predictive distributions resulting from high-frequency and low-frequency data. In an extensive empirical study, we illustrate that turnover penalization is more effective than commonly employed shrinkage methods and is crucial in order to construct empirically well-performing portfolios.

OriginalsprogEngelsk
TidsskriftJournal of Econometrics
Vol/bind212
Udgave nummer1
Sider (fra-til)221-240
Antal sider20
ISSN0304-4076
DOI
StatusUdgivet - sep. 2019
Udgivet eksterntJa

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