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 Network Data Science
- External organisation(s)
- Wirtschaftsuniversität Wien (WU)
- Journal
- Journal of Econometrics
- Volume
- 212
- Pages
- 221-240
- No. of pages
- 20
- 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
- Keywords
- ASJC Scopus subject areas
- Economics and Econometrics
- 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