Models for Portfolio Revision with Transaction Costs in the Mean–Variance Framework

  • Andrew H. Chen
  • Frank J. Fabozzi
  • Dashan Huang


The contribution of the mean–variance framework by Markowitz more than a half century ago cannot be understated. Since that time, the framework has been extended in several ways. One extension has been to consider the practical application of the framework when an existing portfolio of securities must be revised by changing the composition of the portfolio rather than the initial deployment of cash to construct a portfolio. Since then there have been several proposals for modeling portfolio revision with transaction costs within the mean–variance framework. This chapter summarizes these proposals and presents one recently formulated model and some empirical evidence. More specifically, we consider the portfolio revision problem with transaction costs that are paid at the end of the planning horizon, and present some analytical solutions for some special cases in the mean–variance framework. Moveover, a simple empirical experiment with actual market data shows that the impact of the transaction costs is significant, confirming the findings of Chen et al. (1971) that transaction costs should be integrated into the portfolio revision optimization problem, and that lower revision frequency may reduce the magnitude of the impact.


Transaction Cost Planning Horizon Optimal Portfolio Portfolio Selection Risky Asset 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  • Andrew H. Chen
    • 1
  • Frank J. Fabozzi
    • 2
  • Dashan Huang
    • 3
  1. 1.Edwin L. Cox School of BusinessSouthern Methodist UniversityDallasUSA
  2. 2.Yale School of ManagementNew HavenUSA
  3. 3.Olin School of BusinessWashington UniversitySt. LouisUSA

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