Struggling with transaction costs in portfolio selection? This paper introduces a novel approach to managing portfolios in the presence of transaction costs, effectively mapping the problem to one without costs. The research offers a new perspective on active portfolio management, directly connecting quantities of interest to measurable market data. The proposed method links key financial metrics, such as the average lag between trades and the probabilities of price fluctuations, to the problem of transaction costs. By framing the problem in terms of these quantities, the authors are able to develop an active portfolio management strategy based on real-world market measurements. This active management approach, particularly relevant in real markets, leads to analytical results in the Wiener case, providing a valuable tool for financial professionals seeking to optimize portfolio performance in the face of transaction costs. This offers analytic results in the Wiener case, which means that it is based on mathematical and statistical concepts and may give traders and portfolio managers better insight in this topic.
Published in the International Journal of Theoretical and Applied Finance, this paper aligns perfectly with the journal's focus on innovative methods in financial economics. By providing a new perspective on transaction costs and offering analytical results, the research contributes to the theoretical understanding and practical application of finance.