Large-scale portfolio allocation under transaction costs and model uncertainty
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Large-scale portfolio allocation under transaction costs and model uncertainty. / Hautsch, Nikolaus; Voigt, Stefan.
I: Journal of Econometrics, Bind 212, Nr. 1, 09.2019, s. 221-240.Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt
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TY - JOUR
T1 - Large-scale portfolio allocation under transaction costs and model uncertainty
AU - Hautsch, Nikolaus
AU - Voigt, Stefan
PY - 2019/9
Y1 - 2019/9
N2 - We theoretically and empirically study portfolio optimization under transaction costs and establish a link between turnover penalization and covariance shrinkage with the penalization governed by transaction costs. We show how the ex ante incorporation of transaction costs shifts optimal portfolios towards regularized versions of efficient allocations. The regulatory effect of transaction costs is studied in an econometric setting incorporating parameter uncertainty and optimally combining predictive distributions resulting from high-frequency and low-frequency data. In an extensive empirical study, we illustrate that turnover penalization is more effective than commonly employed shrinkage methods and is crucial in order to construct empirically well-performing portfolios.
AB - We theoretically and empirically study portfolio optimization under transaction costs and establish a link between turnover penalization and covariance shrinkage with the penalization governed by transaction costs. We show how the ex ante incorporation of transaction costs shifts optimal portfolios towards regularized versions of efficient allocations. The regulatory effect of transaction costs is studied in an econometric setting incorporating parameter uncertainty and optimally combining predictive distributions resulting from high-frequency and low-frequency data. In an extensive empirical study, we illustrate that turnover penalization is more effective than commonly employed shrinkage methods and is crucial in order to construct empirically well-performing portfolios.
KW - High frequency data
KW - Model uncertainty
KW - Portfolio choice
KW - Regularization
KW - Transaction costs
U2 - 10.1016/j.jeconom.2019.04.028
DO - 10.1016/j.jeconom.2019.04.028
M3 - Journal article
AN - SCOPUS:85063612486
VL - 212
SP - 221
EP - 240
JO - Journal of Econometrics
JF - Journal of Econometrics
SN - 0304-4076
IS - 1
ER -
ID: 248550772