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Optimal Investment and Consumption With Two Bonds and Transaction Costs

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  • S. E. Shreve
  • H. M. Soner
  • G.-L. Xu
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    Abstract

    An agent can invest in a high-yield bond and a low-yield bond, holding either long or short positions in either asset. Any movement of money between these two assets incurs a transaction cost proportional to the size of the transaction. the low-yield bond is liquid in the sense that wealth invested in this bond can be consumed directly without a transaction cost; wealth invested in the high-yield bond can be consumed only by first moving it into the low-yield bond. the problem of optimal consumption and investment on an infinite planning horizon is solved for a class of utility functions larger than the class of power functions. Copyright 1991 Blackwell Publishers.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9965.1991.tb00016.x
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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Mathematical Finance.

    Volume (Year): 1 (1991)
    Issue (Month): 3 ()
    Pages: 53-84

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    Handle: RePEc:bla:mathfi:v:1:y:1991:i:3:p:53-84

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    Cited by:
    1. Kogan, Leonid, 2001. "An equilibrium model of irreversible investment," Journal of Financial Economics, Elsevier, vol. 62(2), pages 201-245, November.
    2. Akian, Marianne & Menaldi, Jose Luis & Sulem, Agn├Ęs, 1995. "Multi-asset portfolio selection problem with transaction costs," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 38(1), pages 163-172.

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