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Portfolio optimization problem under concave transaction costs and minimal transaction unit constraints
Authors:Hiroshi Konno  Annista Wijayanayake
Institution:(1) Department of Industrial Engineering & Management and Center for Research in Advanced Financial Technologies, Tokyo Institute of Technology, Japan. e-mail: konno@me.titech.ac.jp, JP;(2) Department of Industrial Engineering & Management and Tokyo Institute of Technology, Japan. e-mail: anni@me.titech.ac.jp, JP
Abstract:We will propose a branch and bound algorithm for calculating a globally optimal solution of a portfolio construction/rebalancing problem under concave transaction costs and minimal transaction unit constraints. We will employ the absolute deviation of the rate of return of the portfolio as the measure of risk and solve linear programming subproblems by introducing (piecewise) linear underestimating function for concave transaction cost functions. It will be shown by a series of numerical experiments that the algorithm can solve the problem of practical size in an efficient manner. Received: July 15, 1999 / Accepted: October 1, 2000?Published online December 15, 2000
Keywords:: portfolio optimization –  concave transaction cost –  rebalancing –  minimal transaction unit –  branch and bound algorithm            global optimization
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