Parameter uncertainty in multiperiod portfolio optimization with transaction costs

We study the impact of parameter uncertainty on the expected utility of a multiperiod investorsubject to quadratic transaction costs. We characterize the utility loss associatedwith ignoring parameter uncertainty, and show that it is equal to the product betweenthe single-period utility loss and another term that captures the effects of the multiperiodmean-variance utility and transaction cost losses. To mitigate the impact of parameter uncertainty,we propose two multiperiod shrinkage portfolios and demonstrate with simulatedand empirical data sets that they substantially outperform portfolios that ignore parameteruncertainty, transaction costs, or both.

Parameter uncertainty in multiperiod portfolio optimization with transaction costs Articles