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Non-Linear Transaction Costs Inclusion in Mean-Variance Optimization

Author(s): José Euclides de Melo Ferraz | Christian Johannes Zimmer

Journal: Revista Brasileira de Finanças
ISSN 1679-0731

Volume: 3;
Issue: 2;
Start page: 195;
Date: 2005;
Original page

Keywords: portfolio optimization | transaction costs | bid-ask spread | market impact

In this article we propose a new way to include transaction costs into a mean-variance portfolio optimization. We consider brokerage fees, bid/ask spread and the market impact of the trade. A pragmatic algorithm is proposed, which approximates the optimal portfolio, and we can show that is converges in the absence of restrictions. Using Brazilian financial market data we compare our approximation algorithm with the results of a non-linear optimizer.
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