Portfolio Optimization Under Liquidity Cost

In this paper we examine the problem of optimally structuring a portfolio of assets with respect to transaction costs and liquidity effects. We claim that the intention of the portfolio manager is to maximize the expected net return of his portfolio, i.e. the expected return after costs, under a given limit for the portfolio risk. We show how this problem can be characterized by a convex optimization problem and that it can be solved by an equivalent quadratic optimization problem minimizing the portfolio risk under a given minimum level for the expected net return. The liquidity cost is estimated using intraday data of the German stock market. A case study shows how the results can be applied to practical trading problems.     «

In this paper we examine the problem of optimally structuring a portfolio of assets with respect to transaction costs and liquidity effects. We claim that the intention of the portfolio manager is to maximize the expected net return of his portfolio, i.e. the expected return after costs, under a given limit for the portfolio risk. We show how this problem can be characterized by a convex optimization problem and that it can be solved by an equivalent quadratic optimization problem minimizing the...     »