Large-Scale Portfolio Allocation Under Transaction Costs and Model Uncertainty

Author(s)
Nikolaus Hautsch, Stefan Voigt
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.

Organisation(s)
Department of Statistics and Operations Research, Research Platform Data Science @ Uni Vienna
External organisation(s)
Wirtschaftsuniversität Wien (WU)
Journal
Journal of Econometrics
Volume
212
Pages
221-240
ISSN
0304-4076
DOI
https://doi.org/10.1016/j.jeconom.2019.04.028
Publication date
09-2019
Peer reviewed
Yes
Austrian Fields of Science 2012
502025 Econometrics, 502009 Corporate finance
Portal url
https://ucris.univie.ac.at/portal/en/publications/largescale-portfolio-allocation-under-transaction-costs-and-model-uncertainty(d13795ec-1062-40f9-8944-6fcec5928f65).html