Transaction costs: a new point of view

TL;DR

This paper introduces a novel approach to portfolio selection with transaction costs by transforming the problem into a cost-free framework using exit times and barrier probabilities, providing analytical and empirical insights.

Contribution

It presents a new method linking portfolio optimization with exit times and barrier probabilities, enabling analysis without transaction costs.

Findings

Analytic solutions in Wiener process models

Measurable quantities on real market data

New framework for transaction cost analysis

Abstract

We consider a new approach to portfolio selection in presence of transaction costs which allows to map the problem into one without costs. The proposed approach connects all the quantities of interest to exit times and probabilities to reach barriers. This leads to analytic results in the Wiener case and to directly measurable quantities on a historical dataset in real markets.