Title: Dynamically optimal multi-period mean-variance portfolio selection with transaction costs and no-shorting constraint
Authors: Zi Ye - Nanyang Technological University (Singapore) [presenting]
Chi Seng Pun - Nanyang Technological University (Singapore)
Abstract: A mean-variance portfolio selection problem is considered in multi-period with proportional transaction costs under no-shorting constraint. By adopting dynamic programming and duality theory, we derive the analytical solution of the optimal investment policy, which is a piecewise function, and find the boundaries of buying region, no-transaction region, selling region and selling-all region. In addition, with the developed concept of time consistency in efficiency (TCIE), our analysis shows this policy is always TCIE, which means the investor has no incentive to change idea in the whole investment time horizon, besides we find no shorting constraint is a sufficient condition of TCIE for a no transaction model. Furthermore, we use the efficient frontier to illustrate the policy, it shows the allocation of the initial wealth and the proportional transaction cost rates would affect the investor's behavior. The results have implications in the financial market that contains friction rates which should be taken into account in investment problems.