A Unified Approach to Portfolio Optimization with Linear Transaction Costs
AbstractIn this paper we study the continuous time optimal portfolio selection problem for an investor with a finite horizon who maximizes expected utility of terminal wealth and faces transaction costs in the capital market. It is well known that, depending on a particular structure of transaction costs, such a problem is formulated and solved within either stochastic singular control or stochastic impulse control framework. In this paper we propose a unified framework, which generalizes the contemporary approaches and is capable to deal with any problem where transaction costs are a linear/piecewise-linear function of the volume of trade. We also discuss some methods for solving numerically the problem within our unified framework.
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Bibliographic InfoPaper provided by EconWPA in its series GE, Growth, Math methods with number 0404003.
Length: 36 pages
Date of creation: 16 Apr 2004
Date of revision: 21 Apr 2004
Note: Type of Document - pdf; pages: 36
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portfolio choice; transaction costs; stochastic singular control; stochastic impulse control; computational methods;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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