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Portfolio Selection with Transaction Costs
Open accessAbstract
In this paper, optimal consumption and investment decisions are studied for an investor who has available a bank account paying a fixed rate of interest and a stock whose price is a log-normal diffusion. This problem was solved by Merton and others when transactions between bank and stock are costless. Here we suppose that there are charges on all transactions equal to a fixed percentage of the amount transacted. It is shown that the optimal buying and selling policies are the local times of the two-dimensional process of bank and stock holdings at the boundaries of a wedge-shaped region which is determined by the solution of a nonlinear free boundary problem. An algorithm for solving the free boundary problem is given.
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Citations
Cited by
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Björk, T. (2004) · doi:10.1093/0199271267.001.0001 · Cited by 940
Presidential Address: Asset Price Dynamics with Slow‐Moving Capital
DUFFIE, D. (2010) · The Journal of Finance · doi:10.1111/j.1540-6261.2010.01569.x · Cited by 854
Amihud, Y., Mendelson, H., & Pedersen, L. H. (2005) · Foundations and Trends® in Finance · doi:10.1561/0500000003 · Cited by 820
A Taxonomy of Anomalies and Their Trading Costs
Novy-Marx, R., & Velikov, M. (2016) · Review of Financial Studies · doi:10.1093/rfs/hhv063 · Cited by 658
HEDGING AND PORTFOLIO OPTIMIZATION UNDER TRANSACTION COSTS: A MARTINGALE APPROACH12
Cvitanić, J., & Karatzas, I. (1996) · Mathematical Finance · doi:10.1111/j.1467-9965.1996.tb00075.x · Cited by 317
Metadata
- Authors
- Davis, M. H. A., & Norman, A. R.
- Venue
- Mathematics of Operations Research
- Published
- 1990-11
- Volume
- 15
- Issue
- 4
- Pages
- 676-713
- ISSN
- 0364-765X (ISSN-L)
- 1526-5471
- OpenAlex
- W2115580984
- Cited by
- 1,311
- References
- 0
- FWCI
- 18.44
- Type
- journal article
- Language
- en
- Open access
- green
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Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
