Dynamic Portfolio Optimization with Transaction Costs: Heuristics and Dual Bounds

We consider the problem of dynamic portfolio optimization in a discrete-time, finite-horizon setting. Our general model considers risk aversion, portfolio constraints (e.g., no short positions), return predictability, and transaction costs. This problem is naturally formulated as a stochastic dynamic program. Unfortunately, with nonzero transaction costs, the dimension of the state space is at least as large as the number of assets, and the …