Dynamic Trading With Transaction Cost And Its Application

This article considers the optimal portfolio when security returns can be predicted by different signals and there is trading cost. In this situation, the optimal strategy is called dynamic trading, which has two principles:(1)aim in time advance;(2)trade towards the aim partially. The optimal portfolio is updated by time, and so is the aim portfolio. Therefore, we obtain the aim portfolio by calculating the weighted average of the Markowitz portfolios in current time and all future dates. And the optimal portfolio is a combination of the current aim portfolio and the optimal portfolio in the previous period.