Stochastic mean absolute deviation model with random transaction costs: securities from the Johannesburg stock market

Abstract

We propose a multi-stage stochastic mean absolute deviation model with random transaction costs in optimal portfolio selection. We take implicit costs incurred in trading as our transaction costs. The multi-stage stochastic model captures risk due to uncertainty, as well as implicit transaction costs incurred by an investor during initial trading and subsequent rebalancing of the portfolio. We apply the model to securities on the Johannesburg stock market and find out that implicit transaction costs are at least 14.3% of returns on investment.