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A Primer on Portfolio Choice with Small Transaction Costs

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  • Johannes Muhle-Karbe
  • Max Reppen
  • H. Mete Soner

Abstract

This survey is an introduction to asymptotic methods for portfolio-choice problems with small transaction costs. We outline how to derive the corresponding dynamic programming equations and simplify them in the small-cost limit. This allows to obtain explicit solutions in a wide range of settings, which we illustrate for a model with mean-reverting expected returns and proportional transaction costs. For even more complex models, we present a policy iteration scheme that allows to compute the solution numerically.

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  • Johannes Muhle-Karbe & Max Reppen & H. Mete Soner, 2016. "A Primer on Portfolio Choice with Small Transaction Costs," Papers 1612.01302, arXiv.org, revised May 2017.
    • Handle: RePEc:arx:papers:1612.01302
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    3. Alain Bensoussan & Guiyuan Ma & Chi Chung Siu & Sheung Chi Phillip Yam, 2022. "Dynamic mean–variance problem with frictions," Finance and Stochastics, Springer, vol. 26(2), pages 267-300, April.
    4. Ayman Chaouki & Stephen Hardiman & Christian Schmidt & Emmanuel S'eri'e & Joachim de Lataillade, 2020. "Deep Deterministic Portfolio Optimization," Papers 2003.06497, arXiv.org, revised Apr 2020.
    5. Hans Buhler & Lukas Gonon & Josef Teichmann & Ben Wood, 2018. "Deep Hedging," Papers 1802.03042, arXiv.org.
    6. Sarantis Tsiaplias & Qi Zeng & Guay Lim, 2021. "Retail investor expectations and trading preferences," Melbourne Institute Working Paper Series wp2021n27, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    7. Johannes Ruf & Kangjianan Xie, 2019. "The impact of proportional transaction costs on systematically generated portfolios," Papers 1904.08925, arXiv.org.
    8. Thai Nguyen & Mitja Stadje, 2020. "Utility maximization under endogenous pricing," Papers 2005.04312, arXiv.org, revised Mar 2024.
    9. Ruf, Johannes & Xie, Kangjianan, 2020. "Impact of proportional transaction costs on systematically generated portfolios," LSE Research Online Documents on Economics 104696, London School of Economics and Political Science, LSE Library.
    10. Weston Barger & Ryan Donnelly, 2020. "Insider Trading with Temporary Price Impact," Papers 2007.14162, arXiv.org.
    11. Yaroslav Melnyk & Johannes Muhle‐Karbe & Frank Thomas Seifried, 2020. "Lifetime investment and consumption with recursive preferences and small transaction costs," Mathematical Finance, Wiley Blackwell, vol. 30(3), pages 1135-1167, July.
    12. Peter Bank & Moritz Vo{ss}, 2018. "Optimal investment with transient price impact," Papers 1804.07392, arXiv.org.
    13. Xinfu Chen & Min Dai & Wei Jiang & Cong Qin, 2022. "Asymptotic analysis of long‐term investment with two illiquid and correlated assets," Mathematical Finance, Wiley Blackwell, vol. 32(4), pages 1133-1169, October.
    14. Joachim de Lataillade & Ayman Chaouki, 2020. "Equations and Shape of the Optimal Band Strategy," Papers 2003.04646, arXiv.org, revised Mar 2020.
    15. Florian Krach & Josef Teichmann & Hanna Wutte, 2024. "Robust Utility Optimization via a GAN Approach," Papers 2403.15243, arXiv.org.

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