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      • Department of Electrical and Electronics Engineering
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      Optimal investment under transaction costs: A threshold rebalanced portfolio approach

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      Author
      Tunc, S.
      Donmez, M. A.
      Kozat, S. S.
      Date
      2013
      Source Title
      IEEE Transactions on Signal Processing
      Print ISSN
      1053-587X
      Publisher
      IEEE
      Volume
      61
      Issue
      12
      Pages
      3129 - 3142
      Language
      English
      Type
      Article
      Item Usage Stats
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      88
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      Abstract
      We study how to invest optimally in a financial market having a finite number of assets from a signal processing perspective. Specifically, we investigate how an investor should distribute capital over these assets and when he/she should reallocate the distribution of the funds over these assets to maximize the expected cumulative wealth over any investment period. In particular, we introduce a portfolio selection algorithm that maximizes the expected cumulative wealth in i.i.d. two-asset discrete-time markets where the market levies proportional transaction costs in buying and selling stocks. We achieve this using 'threshold rebalanced portfolios', where trading occurs only if the portfolio breaches certain thresholds. Under the assumption that the relative price sequences have log-normal distribution from the Black-Scholes model, we evaluate the expected wealth under proportional transaction costs and find the threshold rebalanced portfolio that achieves the maximal expected cumulative wealth over any investment period. Our derivations can be readily extended to markets having more than two stocks, where these extensions are provided in the paper. As predicted from our derivations, we significantly improve the achieved wealth with respect to the portfolio selection algorithms from the literature on historical data sets under both mild and heavy transaction costs.
      Keywords
      Continuous distribution
      Discrete-time market
      Portfolio management
      Threshold rebalancing
      Continuous distribution
      Discrete-time market
      Portfolio managements
      Rebalancing
      Transaction cost
      Algorithms
      Commerce
      Costs
      Financial data processing
      Sequential switching
      Signal processing
      Investments
      Permalink
      http://hdl.handle.net/11693/20935
      Published Version (Please cite this version)
      http://dx.doi.org/10.1109/TSP.2013.2258339
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      • Department of Electrical and Electronics Engineering 3524
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