Authors: C. Kenneth Jones
Addresses: Graduate School of Management and Technology, University of Maryland University College, 4300 NW 23rd Avenue Suite 125, Gainesville, FL 32606, USA
Abstract: In this study, we use zero-one variables to control fixed transaction costs independent of trade size in the portfolio selection problem. The optimal solution to the maximum flow, risk constrained stochastic portfolio network is found using Digital Portfolio Theory (DPT). Digital signals describe return processes and power spectral densities describe variances of long and short horizon returns. We find high fixed trading costs reduce size and affect composition of optimal portfolios for small investors or long holding periods. High risk portfolios are more sensitive to trading costs. Optimal portfolios for active traders or large portfolios are largely unaffected by fixed commission costs.
Keywords: integer programming; investment analysis; digital portfolio theory; DPT; stochastic generalised portfolio networks; digital signal processing; DSP; industrial engineering; fixed trading costs; fixed transaction costs; fixed commission costs; brokerage fees; portfolio selection; decision support.
European Journal of Industrial Engineering, 2007 Vol.1 No.1, pp.5 - 21
Published online: 05 Mar 2007 *Full-text access for editors Access for subscribers Purchase this article Comment on this article