Large-Scale Portfolio Allocation Under Transaction Costs and Model Uncertainty

Nikolaus Hautsch, Stefan Voigt

Publication: Scientific journalJournal articlepeer-review

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.
Original languageEnglish
Pages (from-to)221 - 240
JournalJournal of Econometrics
Volume212
Issue number1
DOIs
Publication statusPublished - 2019

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 502010 Public finance
  • 502025 Econometrics

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