Before revision: We theoretically and empirically study large-scale portfolio allocation problems when transaction costs are taken into account in the optimization problem. We show that transaction costs act on the one hand as a turnover penalization and on the other hand as a regularization, which shrinks the covariance matrix.
After revision: We theoretically and empirically study portfolio optimization under transaction costs and establish a link between turnover penalization and on the other hand as a regularization, which shrinks the covariance matrix.