A Stability Approach to Mean-Variance Optimization

Kourtis, Apostolos (2015) A Stability Approach to Mean-Variance Optimization. Financial Review, 50 (3). pp. 301-330. ISSN 1540-6288

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    Abstract

    I jointly treat two critical issues in the application of mean-variance portfolios, that is, estimation risk and portfolio instability. I find that theory-based portfolio strategies, which are known to outperform naive diversification (inline image) in the absence of transaction costs, heavily underperform it under transaction costs. This is because they are highly unstable over time. I propose a generic method to stabilize any given portfolio strategy while maintaining or improving its efficiency. My empirical analysis confirms that the new method leads to stable and efficient portfolios that offer equal or lower turnover than inline image and larger Sharpe ratio, even under high transaction costs.

    Item Type: Article
    Uncontrolled Keywords: portfolio choice,stability,estimation risk,transaction costs
    Faculty \ School: Faculty of Social Sciences > Norwich Business School
    University of East Anglia > Faculty of Social Sciences > Research Groups > Accounting, Finance and Governance
    Depositing User: Pure Connector
    Date Deposited: 12 Mar 2015 09:50
    Last Modified: 25 Jul 2018 10:23
    URI: https://ueaeprints.uea.ac.uk/id/eprint/52600
    DOI: 10.1111/fire.12068

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