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Controlling the risky fraction process with an ergodic criterion

Author

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  • Yiannis Kamarianakis

    (Regional Analysis Division, Institute of Applied and Computational Mathematics, Foundation for Research and Technology-Hellas, Greece)

  • Anastasios Xepapadeas

    (Department of Economics, University of Crete, Greece)

Abstract

This article examines a tracking problem, similar to the one presented in Pliska and Suzuki (Quantitative Finance, 2004): an investor would keep constant proportions of her wealth in different assets if markets were frictionless; however, in the presence of fixed and proportional transaction costs her implementation problem is to keep asset proportions close to the target levels whilst avoiding too much intervention costs. Instead of minimizing discounted tracking error plus transaction costs over an infinite horizon, the optimization objective here is minimization of long run tracking error plus intervention costs per unit time. This ergodic problem is treated via combining basic tools from diffusion theory and nonlinear optimization techniques. A comparative sensitivity analysis of the ergodic and discounted problems is undertaken.

Suggested Citation

  • Yiannis Kamarianakis & Anastasios Xepapadeas, 2006. "Controlling the risky fraction process with an ergodic criterion," Working Papers 0710, University of Crete, Department of Economics.
    • Handle: RePEc:crt:wpaper:0710
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    References listed on IDEAS

    as
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