Portfolio Optimization in the Financial Market with Correlated Returns under Constraints, Transaction Costs and Different Rates for Borrowing and Lending

TL;DR

This paper addresses optimal portfolio selection considering correlated asset returns, transaction costs, and borrowing/lending rate differences, using a dynamic tracking approach tested on real Russian Stock Exchange data.

Contribution

It introduces a model that handles correlated returns and constraints without assuming specific correlation structures or return distributions.

Findings

Effective portfolio optimization under complex constraints.

Model performs well on real market data.

No assumptions on return distribution or correlation structure.

Abstract

In this work, we consider the optimal portfolio selection problem under hard constraints on trading amounts, transaction costs and different rates for borrowing and lending when the risky asset returns are serially correlated. No assumptions about the correlation structure between different time points or about the distribution of the asset returns are needed. The problem is stated as a dynamic tracking problem of a reference portfolio with desired return. Our approach is tested on a set of a real data from Russian Stock Exchange MICEX.