VaR optimal portfolio with transaction costs

VaR optimal portfolio with transaction costs

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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: , ,
Keywords: optimization, programming: nonlinear
Abstract:

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.

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