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An Exact Solution to a Dynamic Portfolio Choice Problem under Transactions Costs

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Author Info
 Dumas, Bernard
Luciano, Elisa

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Abstract

The presence of any friction in financial markets qualitatively changes the nature of the optimization problem faced by an investor. It requires one to either act or do nothing, an issue which, of course, does not arise in frictionless situations. The investor considered here accumulates wealth without consuming until some terminal point in time when he consumes all. His objective is to maximize the expected utility derived from that terminal consumption. We postpone the terminal point far into the future to obtain a stationary portfolio rule. The portfolio policy is in the form of two control barriers between which portfolio proportions are allowed to fluctuate. We show how to calculate them. Copyright 1991 by American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 46 (1991)
Issue (Month): 2 (June)
Pages: 577-95
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Handle: RePEc:bla:jfinan:v:46:y:1991:i:2:p:577-95

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  1. Koren, Miklós & Szeidl, Adam, 2003. "Portfolio Choice with Illiquid Assets," CEPR Discussion Papers 3795, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Gautam Goswami & Milind Shrikhande & Liuren Wu, 2002. "A Dynamic Equilibrium Model of Real Exchange Rates with General Transaction Costs," Finance 0207016, EconWPA. [Downloadable!]
  3. Elyès Jouini, 2001. "Arbitrage and Control Problems in Finance. Presentation," Post-Print halshs-00167152_v1, HAL. [Downloadable!]
    Other versions:
  4. Hayne E. Leland, 1996. "Optimal Asset Rebalancing in the Presence of Transactions Costs," Finance 9610004, EconWPA, revised 29 Oct 1996. [Downloadable!]
    Other versions:
  5. Elyès Jouini & Hédi Kallal, 1999. "Efficient Trading Strategies in the Presence of Market Frictions," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-035, New York University, Leonard N. Stern School of Business-. [Downloadable!]
    Other versions:
  6. Elyès Jouini, 2003. "Market imperfections , equilibrium and arbitrage," Post-Print halshs-00167131_v1, HAL. [Downloadable!]
    Other versions:
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