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A simple algorithm to incorporate transactions costs in quadratic optimisation

Adcock, C.J. and Meade, N. (1994) A simple algorithm to incorporate transactions costs in quadratic optimisation. European Journal of Operational Research, 79 (1). pp. 85-94. ISSN 0377-2217

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Abstract

Quantitative fund management invariably involves portfolio performance being measured in terms of a quadratic objective function (due to the inclusion of variance terms as a measure of risk). Periodically, the constituents of the fund are adjusted to improve performance. This adjustment incurs a transaction cost which is a modulus function of the changes in holdings. Thus the fund manager wishes to minimise a combined quadratic and modulus function. This paper presents a new approach to deal with the minimisation of this hybrid function, using a well tried quadratic programming algorithm. The new algorithm is demonstrated using a tactical asset allocation problem and an equity index tracking fund.

Item Type: Article
Keywords: Finance; Quadratic programming; Portfolio selection; MAD estimation
Academic Units: The University of Sheffield > Faculty of Social Sciences (Sheffield) > Sheffield University Management School
Depositing User: Miss Anthea Tucker
Date Deposited: 21 Jun 2010 15:09
Last Modified: 21 Jun 2010 15:09
Published Version: http://dx.doi.org/10.1016/0377-2217(94)90397-2
Status: Published
Publisher: Elsevier
Identification Number: 10.1016/0377-2217(94)90397-2
URI: http://eprints.whiterose.ac.uk/id/eprint/10944

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