Article ID: | iaor201111954 |
Volume: | 218 |
Issue: | 8 |
Start Page Number: | 4626 |
End Page Number: | 4637 |
Publication Date: | Dec 2011 |
Journal: | Applied Mathematics and Computation |
Authors: | Kreji Nataa, Kumaresan Miles, Ronjikc Andrea |
Keywords: | optimization, programming: nonlinear |
We consider the problem of portfolio optimization under VaR risk measure taking into account transaction costs. Fixed costs as well as impact costs as a nonlinear function of trading activity are incorporated in the optimal portfolio model. Thus the obtained model is a nonlinear optimization problem with nonsmooth objective function. The model is solved by an iterative method based on a smoothing VaR technique. We prove the convergence of the considered iterative procedure and demonstrate the nontrivial influence of transaction costs on the optimal portfolio weights.