Large-Scale Portfolio Allocation Under Transaction Costs and Model Uncertainty

Hautsch, Nikolaus and Voigt, Stefan (2019) Large-Scale Portfolio Allocation Under Transaction Costs and Model Uncertainty. Journal of Econometrics, 212 (1). pp. 221-240. ISSN 03044076


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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.

Item Type: Article
Keywords: Portfolio choice, transaction costs, model uncertainty, regularization, high frequency data
Classification Codes: JEL C11, C52, 58, G11
Divisions: Departments > Finance, Accounting and Statistics > Financial Research
Version of the Document: Draft
Depositing User: Gertraud Novotny
Date Deposited: 06 Aug 2018 07:10
Last Modified: 26 Sep 2019 03:54
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