Optimal portfolio selection with uncertain implicit transaction costs in a dynamic stochastic framework
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Date
2019-07
Authors
Mushori, Sabastine
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Free State
Abstract
This thesis proposes scenario-based approaches and decision models for some problem contexts in investment decision-making which include (i) optimal portfolio investment in periods of economic booms and recessions, (ii) the incorporation of uncertainty in implicit transaction costs incurred in initial trading and in subsequent rebalancing of portfolios, and (iii) the development of a strategy that captures uncertainty in stock prices and in corresponding implicit trading costs by way of scenarios. The method ological advances of the thesis offer several novel insights into the above decision problems. Firstly, the mean absolute deviation model is developed and extended into a stochastic multi-stage model that incorporates uncertainty of implicit transaction costs, asset returns and risk in optimal portfolio selection. This methodology allows investors and investment managers to choose optimal portfolios realising the impact of associated uncertain implicit transaction costs. Secondly, a stochastic multi-stage trading cost model is developed that also takes into account uncertainty of implicit transaction costs, assets’ returns and portfolio risk. This strategy generates optimal portfolios by minimising total implicit transaction costs incurred. Thirdly, a multi-stage stochastic optimal portfolio policy that minimises maximum downside risk in the presence of uncertain implicit transaction costs is proposed. This strategy is appropriate for a risk-averse and conservative investor who is highly concerned about the performance of his portfolio in an economic recession environment. Fourthly, a dynamic stochastic methodology in optimal portfolio selection that maximises upside deviations (investment opportunities) and minimises maximum downside risk while taking into account uncertain implicit transaction costs incurred in initial trading and recourse times is developed. Lastly, the mean-variance model is extended to become multi-period and to incorporate uncertainty in implicit transaction costs, asset returns and portfolio risk. All the proposed models capture uncertainty in implicit transaction costs, portfolio return and risk by way of scenarios.
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Keywords
Thesis (Ph.D. (Mathematical Statistics))--University of the Free State, 2019, Stochastic modeling, Uncertain implicit transaction costs, Downside risk, Uncertainty, Investment opportunity