Rights statement: http://journals.cambridge.org/action/displayJournal?jid=JFQ The final, definitive version of this article has been published in the Journal, Journal of Financial and Quantitative Analysis, 50 (6), pp 1443-1471 2015, © 2015 Cambridge University Press.
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TY - JOUR
T1 - Parameter uncertainty in multiperiod portfolio optimization with transaction costs
AU - DeMiguel, Victor
AU - Martin Utrera, Alberto
AU - Nogales, Francisco J.
N1 - http://journals.cambridge.org/action/displayJournal?jid=JFQ The final, definitive version of this article has been published in the Journal, Journal of Financial and Quantitative Analysis, 50 (6), pp 1443-1471 2015, © 2015 Cambridge University Press.
PY - 2015/12
Y1 - 2015/12
N2 - We study the impact of parameter uncertainty in the expected utility of a multiperiod investor subject to quadratic transaction costs. We characterize the utility loss associated with ignoring parameter uncertainty, and show that it is equal to the product between the single-period utility loss and another term that captures the effects of the multiperiod mean-variance utility and transaction cost losses. To mitigate the impact of parameter uncertainty, we propose two multiperiod shrinkage portfolios and demonstrate with simulated and empirical datasets that they substantially outperform portfolios that ignore parameter uncertainty, transaction costs, or both.
AB - We study the impact of parameter uncertainty in the expected utility of a multiperiod investor subject to quadratic transaction costs. We characterize the utility loss associated with ignoring parameter uncertainty, and show that it is equal to the product between the single-period utility loss and another term that captures the effects of the multiperiod mean-variance utility and transaction cost losses. To mitigate the impact of parameter uncertainty, we propose two multiperiod shrinkage portfolios and demonstrate with simulated and empirical datasets that they substantially outperform portfolios that ignore parameter uncertainty, transaction costs, or both.
U2 - 10.1017/S002210901500054X
DO - 10.1017/S002210901500054X
M3 - Journal article
VL - 50
SP - 1443
EP - 1471
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
SN - 0022-1090
IS - 6
ER -