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Parameter uncertainty in multiperiod portfolio optimization with transaction costs

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>12/2015
<mark>Journal</mark>Journal of Financial and Quantitative Analysis
Issue number6
Number of pages29
Pages (from-to)1443-1471
Publication StatusPublished
<mark>Original language</mark>English


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.

Bibliographic note

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.