We theoretically and empirically study large-scale portfolio allocation problems when transaction costs are taken into account in the optimization problem. We show that transaction costs act on the one hand as a turnover penalization and on the other hand as a regularization, which shrinks the...

The purpose of this paper is to model differential rates over residual information sets, so as to shape transactional algebras into operational grounds. Firstly, simple differential rates over residual information sets are introduced by taking advantage of finite algebras of sets. Secondly,...

This chapter surveys theoretical research on the long-term performance of fixed-mix investment strategies. These self-financing strategies rebalance the portfolio over time so as to keep constant the proportions of wealth invested in various assets. The main result is that wealth can be grown...

We examine the impact of trading costs on pairs trading profitability in the US equity market over the period 1963-2009. After controlling for commissions, market impact and short selling fees; we find that pairs trading remains profitable, albeit at much more modest levels. Specifically, we...

We consider the problem of tracking the optimal allocation between a risky and a risk-free asset when the expected return is stochastic and trading incurs transaction costs. The rebalancing policy optimises the tradeoff between the opportunity cost of holding a suboptimal portfolio and the...

The transaction costs applied by various european online brokers are now given by piecewise affine functions. So it is interesting to analyze the behaviour of any portfolio in this market context. Our purpose in this work is to determine the expected value and variance of a portfolio return...

We provide a closed-form solution to an optimal investment and consumption problem for a constant absolute risk aversion (CARA) agent, who faces execution costs when trading correlated risky assets with return predictability. The optimal investment strategy indicates that the agent should trade...

We propose a simple approach to dynamic multi-period portfolio choice with transaction costs that is tractable in settings with a large number of securities, realistic return dynamics with multiple risk factors, many predictor variables, and stochastic volatility. We obtain a closed-form...

We examine the interplay between event risk, transaction costs and predictability on the dynamic asset allocation of an investor with discrete trading opportunities. The model is calibrated to the U.S. stock market and a Gauss-Hermite quadrature approach is used to solve the investor's dynamic...

We study how trading costs are reflected in equilibrium returns. To this end, we develop a tractable continuous-time risk-sharing model, where heterogeneous mean-variance investors trade subject to a quadratic transaction cost. The corresponding equilibrium is characterized as the unique...