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Conference Paper: Importance of Transaction Costs for Asset Allocations in FX Markets
Title | Importance of Transaction Costs for Asset Allocations in FX Markets |
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Authors | |
Keywords | Transaction Costs Mean-Variance Optimization Asset Allocation Foreign Exchange |
Issue Date | 2020 |
Citation | American Finance Association (AFA) 2020 Annual Meeting, San Diego, CA, USA, 3-5 January 2020 How to Cite? |
Abstract | Taking transaction costs into account in a mean-variance portfolio optimization in FX markets significantly improves the after cost Sharpe ratio out-of-sample. The optimization reduces trading costs and turnover, whereas the before cost performance remains unchanged. Rules-of-thumb to reduce costs – such as (i) construct equally weighted strategies, (ii) trade at a low frequency, (iii) restrict trading to low cost assets, (iv) only rebalance if the current position is far from the desired position, or (v) use expected returns net of costs in the optimization – are inefficient as there are adverse effects on the (before cost) performance which dominate the cost savings. |
Description | Session: New Advances in International Finance |
Persistent Identifier | http://hdl.handle.net/10722/285520 |
DC Field | Value | Language |
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dc.contributor.author | Maurer, TA | - |
dc.contributor.author | Pezzo, L | - |
dc.contributor.author | Taylor, M | - |
dc.date.accessioned | 2020-08-18T03:54:10Z | - |
dc.date.available | 2020-08-18T03:54:10Z | - |
dc.date.issued | 2020 | - |
dc.identifier.citation | American Finance Association (AFA) 2020 Annual Meeting, San Diego, CA, USA, 3-5 January 2020 | - |
dc.identifier.uri | http://hdl.handle.net/10722/285520 | - |
dc.description | Session: New Advances in International Finance | - |
dc.description.abstract | Taking transaction costs into account in a mean-variance portfolio optimization in FX markets significantly improves the after cost Sharpe ratio out-of-sample. The optimization reduces trading costs and turnover, whereas the before cost performance remains unchanged. Rules-of-thumb to reduce costs – such as (i) construct equally weighted strategies, (ii) trade at a low frequency, (iii) restrict trading to low cost assets, (iv) only rebalance if the current position is far from the desired position, or (v) use expected returns net of costs in the optimization – are inefficient as there are adverse effects on the (before cost) performance which dominate the cost savings. | - |
dc.language | eng | - |
dc.relation.ispartof | American Finance Association (AFA) Annual Meeting, 2020 | - |
dc.subject | Transaction Costs | - |
dc.subject | Mean-Variance | - |
dc.subject | Optimization | - |
dc.subject | Asset Allocation | - |
dc.subject | Foreign Exchange | - |
dc.title | Importance of Transaction Costs for Asset Allocations in FX Markets | - |
dc.type | Conference_Paper | - |
dc.identifier.email | Maurer, TA: maurer@hku.hk | - |
dc.identifier.authority | Maurer, TA=rp02560 | - |
dc.identifier.hkuros | 312880 | - |