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Impact of proportional transaction costs on systematically generated portfolios

Ruf, Johannes and Xie, Kangjianan (2020) Impact of proportional transaction costs on systematically generated portfolios. SIAM Journal on Financial Mathematics. ISSN 1945-497X (In Press)

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Abstract

The effect of proportional transaction costs on systematically generated portfolios is studied em- pirically. The performance of several portfolios (the index tracking portfolio, the equally-weighted portfolio, the entropy-weighted portfolio, and the diversity-weighted portfolio) in the presence of dividends and transaction costs is examined under different configurations involving the trading fre- quency, constituent list size, and renewing frequency. All portfolios outperform the index tracking portfolio in the absence of transaction costs. This outperformance is statistically significant for daily and weekly traded portfolios but not for monthly traded portfolios. However, when proportional transaction costs of 0.5% are imposed, most portfolios no longer outperform the market. Some exceptional cases include the entropy-weighted and the diversity-weighted portfolios under specific configurations. The only statistical significant difference appears for the relative underperformance of the equally-weighted portfolio.

Item Type: Article
Official URL: https://epubs.siam.org/journal/sjfmbj
Additional Information: © 2020 Society for Industrial and Applied Mathematics
Divisions: Mathematics
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics
Date Deposited: 03 Jun 2020 09:12
Last Modified: 26 Jun 2020 23:30
URI: http://eprints.lse.ac.uk/id/eprint/104696

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