A Note on the Three-Portfolios Matching Problem
Journal
European Financial Management
ISSN
1354-7798
ISSN-Digital
1468-036X
Type
journal article
Date Issued
2002-12-01
Author(s)
Trojani, Fabio
;
Vanini, Paolo
;
Vignola, Luigi
Abstract
A typical problem arising in financial planning for private investors consists in the fact that the initial investor's portfolio, the one determined by the consulting process of the financial institution and the universe of instruments made available to the investor have to be matched/optimised when determining the relevant portfolio choice. We call this problem the three-portfolios matching problem. Clearly, the resulting portfolio selection should be as close as possible to the optimal asset allocation determined by the consulting process of the financial institution. However, the transition from the investor's initial portfolio to the final one is complicated by the presence of transaction costs and some further more specific constraints. Indeed, usually the portfolios under consideration are structured at different aggregation levels, making portfolios comparison and matching more difficult. Further, several investment restrictions have to be satisfied by the final portfolio choice. Finally, the arising portfolio selection process should be sufficiently transparent in order to incorporate the subjective investor's trade-off between the objectives ‘optimal portfolio matching' and ‘minimal portfolio transition costs'. In this paper, we solve the three-portfolios matching problem analytically for a simplified setting that illustrates the main features of the arising solutions and numerically for the more general situation.
Language
English
Keywords
transaction costs
portfolio matching
portfolio selection
HSG Classification
not classified
Refereed
No
Publisher
Blackwell
Publisher place
Oxford
Volume
8
Number
4
Start page
515
End page
527
Pages
13
Subject(s)
Division(s)
Eprints ID
12646