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Asia-Pacific Financial Markets

, Volume 18, Issue 2, pp 191–211 | Cite as

Constant Rebalanced Portfolio Optimization Under Nonlinear Transaction Costs

  • Yuichi Takano
  • Jun-ya GotohEmail author
Article

Abstract

We study the constant rebalancing strategy for multi-period portfolio optimization via conditional value-at-risk (CVaR) when there are nonlinear transaction costs. This problem is difficult to solve because of its nonconvexity. The nonlinear transaction costs and CVaR constraints make things worse; state-of-the-art nonlinear programming (NLP) solvers have trouble in reaching even locally optimal solutions. As a practical solution, we develop a local search algorithm in which linear approximation problems and nonlinear equations are iteratively solved. Computational results are presented, showing that the algorithm attains a good solution in a practical time. It is better than the revised version of an existing global optimization. We also assess the performance of the constant rebalancing strategy in comparison with the buy-and-hold strategy.

Keywords

Multi-period portfolio optimization Constant rebalancing Transaction cost Conditional value-at-risk Market impact cost 

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Copyright information

© Springer Science+Business Media, LLC. 2010

Authors and Affiliations

  1. 1.Graduate School of Systems and Information EngineeringUniversity of TsukubaIbarakiJapan
  2. 2.Department of Industrial and Systems EngineeringChuo UniversityTokyoJapan

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