Title: Stochastic mean absolute deviation model with random transaction costs: securities from the Johannesburg stock market
Authors: S. Mushori; D. Chikobvu
Addresses: Department of Mathematics, Science and Technology Education, Central University of Technology, P.O. Box 1881, Welkom, 9460, Free State, South Africa ' Department of Mathematical Statistics and Actuarial Science, University of Free State, P.O. Box 339, Bloemfontein, 9300, South Africa
Abstract: We propose a multi-stage stochastic mean absolute deviation model with random transaction costs in optimal portfolio selection. We take implicit costs incurred in trading as our transaction costs. The multi-stage stochastic model captures risk due to uncertainty, as well as implicit transaction costs incurred by an investor during initial trading and subsequent rebalancing of the portfolio. We apply the model to securities on the Johannesburg stock market and find out that implicit transaction costs are at least 14.3% of returns on investment.
Keywords: stochastic mean absolute deviation; random transaction costs; uncertainty; risk; stochastic modelling; portfolio rebalancing; securities; South Africa; stock markets; implicit costs; return on investment; RoI.
International Journal of Operational Research, 2016 Vol.26 No.2, pp.127 - 152
Received: 10 Dec 2013
Accepted: 17 Mar 2014
Published online: 01 May 2016 *