Abstract:
We propose a multi-stage stochastic mean absolute deviation model
with random transaction costs in optimal portfolio selection. We take implicit
costs incurred in trading as our transaction costs. The multi-stage stochastic
model captures risk due to uncertainty, as well as implicit transaction costs
incurred by an investor during initial trading and subsequent rebalancing of the
portfolio. We apply the model to securities on the Johannesburg stock market
and find out that implicit transaction costs are at least 14.3% of returns on
investment.
