Liquidity risks, transaction costs and online portfolio selection

Youngmin Ha, Hai Zhang

Research output: Contribution to conferencePaper

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.

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

Fingerprint

Portfolio selection
Transaction costs
Market impact
Costs
Liquidity risk
Market liquidity
Limit order book
Wealth
Backtesting
Deterioration
Proportional transaction costs
Tax
Brokerage

Keywords

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

Cite this

Ha, Y., & Zhang, H. (Accepted/In press). Liquidity risks, transaction costs and online portfolio selection. 1-44. Paper presented at 30th Anniversary of CEA (1988-2018) 29th CEA (UK) & 10th CEA (Europe) Annual Conference, Edinburgh, United Kingdom.
Ha, Youngmin ; Zhang, Hai. / Liquidity risks, transaction costs and online portfolio selection. Paper presented at 30th Anniversary of CEA (1988-2018) 29th CEA (UK) & 10th CEA (Europe) Annual Conference, Edinburgh, United Kingdom.44 p.
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Ha, Y & Zhang, H 2018, 'Liquidity risks, transaction costs and online portfolio selection' Paper presented at 30th Anniversary of CEA (1988-2018) 29th CEA (UK) & 10th CEA (Europe) Annual Conference, Edinburgh, United Kingdom, 22/06/18 - 23/06/18, pp. 1-44.

Liquidity risks, transaction costs and online portfolio selection. / Ha, Youngmin ; Zhang, Hai.

2018. 1-44 Paper presented at 30th Anniversary of CEA (1988-2018) 29th CEA (UK) & 10th CEA (Europe) Annual Conference, Edinburgh, United Kingdom.

Research output: Contribution to conferencePaper

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Ha Y, Zhang H. Liquidity risks, transaction costs and online portfolio selection. 2018. Paper presented at 30th Anniversary of CEA (1988-2018) 29th CEA (UK) & 10th CEA (Europe) Annual Conference, Edinburgh, United Kingdom.