Shadow price in the power utility case
AbstractWe consider the problem of maximizing expected power util- ity from consumption over an infinite horizon in the Black-Scholes model with proportional transaction costs, as studied in the paper Shreve and Soner (1994). Similarly to Kallsen and Muhle-Karbe (2010), we derive a shadow price, that is, a frictionless price process with values in the bid-ask spread which leads to the same optimal policy. In doing so we explore and exploit the strong relationship between the shadow price and the Hamilton-Jacobi-Bellman-equation.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1112.4385.
Date of creation: Dec 2011
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-03 (All new papers)
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- Johannes Muhle-Karbe & Ren Liu, 2012. "Portfolio Selection with Small Transaction Costs and Binding Portfolio Constraints," Papers 1205.4588, arXiv.org, revised Jan 2013.
- Paolo Guasoni & Johannes Muhle-Karbe, 2012. "Portfolio Choice with Transaction Costs: a User's Guide," Papers 1207.7330, arXiv.org.
- Giuseppe Benedetti & Luciano Campi & Jan Kallsen & Johannes Muhle-Karbe, 2013. "On the existence of shadow prices," Finance and Stochastics, Springer, vol. 17(4), pages 801-818, October.
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