Optimal Investment with Transaction Costs and Stochastic Volatility
AbstractTwo major financial market frictions are transaction costs and uncertain volatility, and we analyze their joint impact on the problem of portfolio optimization. When volatility is constant, the transaction costs optimal investment problem has a long history, especially in the use of asymptotic approximations when the cost is small. Under stochastic volatility, but with no transaction costs, the Merton problem under general utility functions can also be analyzed with asymptotic methods. Here, we look at the long-run growth rate problem when both frictions are present, using separation of time scales approximations. This leads to perturbation analysis of an eigenvalue problem. We find the first term in the asymptotic expansion in the time scale parameter, of the optimal long-term growth rate, and of the optimal strategy, for fixed small transaction costs
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1401.0562.
Date of creation: Jan 2014
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-01-10 (All new papers)
- NEP-ORE-2014-01-10 (Operations Research)
- NEP-UPT-2014-01-10 (Utility Models & Prospect Theory)
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