Portfolio Selection with Small Transaction Costs and Binding Portfolio Constraints
AbstractAn investor with constant relative risk aversion and an infinite planning horizon trades a risky and a safe asset with constant investment opportunities, in the presence of small transaction costs and a binding exogenous portfolio constraint. We explicitly derive the optimal trading policy, its welfare, and implied trading volume. As an application, we study the problem of selecting a prime broker among alternatives with different lending rates and margin requirements. Moreover, we discuss how changing regulatory constraints affect the deposit rates offered for illiquid loans.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1205.4588.
Date of creation: May 2012
Date of revision: Jan 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-29 (All new papers)
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