Pivoting Algorithm for Optimization Model of Portfolio Rebalancing with Transaction Costs

Portfolio optimization is an important branch to which optimization methods are applied. Transaction costs have significant influence on portfolio rebalancing in practice. The introduction of transaction costs into optimal rebalancing model significantly enlarges the size of optimization problem and need more efficient algorithms. We deduce the relationships between the Karush-Kuhn-Tucker (KKT) conditions of the original model and those of its sub-problem. Pivoting algorithm can make full use of these relationships to obtain the optimal solution for the original model efficiently from that for its subproblem.