ABSTRACT

In this short note, we consider mean-variance optimized portfolios with transaction costs. We show that introducing quadratic transaction costs makes the optimization problem more difficult than using linear transaction costs. The reason lies in the specification of the budget constraint, which is no longer linear. We provide numerical algorithms for solving this issue and illustrate how transaction costs may considerably impact the expected returns of optimized portfolios.

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Authors

Quantitative Research
RC - Author - LEZMI Edmond
Head of Alternative Quant Portfolio Strategy, Amundi Investment Institute
RC - Author - RONCALLI Thierry
PhD, Head of Quant Portfolio Strategy, Amundi Investment Institute
RC - Author - Jiali Xu
Alternative Quant Portfolio Strategy, Amundi Investment Institute