Parameter uncertainty in multiperiod portfolio optimization with transaction costs

DeMiguel, Victor and Martin Utrera, Alberto and Nogales, Francisco J. (2015) Parameter uncertainty in multiperiod portfolio optimization with transaction costs. Journal of Financial and Quantitative Analysis, 50 (6). pp. 1443-1471. ISSN 0022-1090

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Abstract

We study the impact of parameter uncertainty in the expected utility of a multiperiod investor subject to quadratic transaction costs. We characterize the utility loss associated with ignoring parameter uncertainty, and show that it is equal to the product between the single-period utility loss and another term that captures the effects of the multiperiod mean-variance utility and transaction cost losses. To mitigate the impact of parameter uncertainty, we propose two multiperiod shrinkage portfolios and demonstrate with simulated and empirical datasets that they substantially outperform portfolios that ignore parameter uncertainty, transaction costs, or both.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Financial and Quantitative Analysis
Additional Information:
http://journals.cambridge.org/action/displayJournal?jid=JFQ The final, definitive version of this article has been published in the Journal, Journal of Financial and Quantitative Analysis, 50 (6), pp 1443-1471 2015, © 2015 Cambridge University Press.
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1400/1402
Subjects:
ID Code:
70717
Deposited By:
Deposited On:
11 Sep 2014 08:31
Refereed?:
Yes
Published?:
Published
Last Modified:
05 Dec 2020 02:33