Liquidity risks, transaction costs and online portfolio selection

Youngmin Ha, Hai Zhang

Research output: Contribution to conferencePaper

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Abstract

The performance of online (sequential) portfolio selection (OPS), which rebalances a portfolio in every period (e.g. daily or weekly) in order to maximise the portfolio's expected terminal wealth in the long run, has been overestimated by the ideal assumption of unlimited market liquidity (i.e. no market impact costs). Therefore, a new transaction cost factor model that considers both market impact costs, estimated from limit order book data, and proportional transaction costs (e.g. brokerage commissions or transaction taxes in a fixed percentage) has been proposed in this paper to measure existing OPS strategies performance in a more practical way as well as to develop a more effective OPS method. Backtesting results from the historical limit order book (LOB) data of NASDAQ-traded stocks show both the performance deterioration of existing OPS methods by the market impact costs and the superiority of our proposed OPS method in the environment of limited market liquidity.
Original languageEnglish
Pages1-44
Number of pages44
Publication statusAccepted/In press - 20 Apr 2018
Event30th Anniversary of CEA (1988-2018) 29th CEA (UK) & 10th CEA (Europe) Annual Conference: China’s Path to the New Era - 29 Buccleuch Place,Edinburgh, EH8 9JS, UK, Edinburgh, United Kingdom
Duration: 22 Jun 201823 Jun 2018
http://cea2018.weebly.com/call-for-papers.html

Conference

Conference30th Anniversary of CEA (1988-2018) 29th CEA (UK) & 10th CEA (Europe) Annual Conference
Abbreviated title2018 CEA Conference
CountryUnited Kingdom
CityEdinburgh
Period22/06/1823/06/18
Internet address

Keywords

  • online portfolio selection
  • transaction cost
  • market impact cost
  • liquidity risks
  • LOB

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