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A Primer on Portfolio Choice with Small Transaction Costs

Author

Listed:
  • H. Mete Soner

    (Department of Mathematics, ETH Zürich, 8092 Zürich, Switzerland)

  • Johannes Muhle-Karbe

    (Department of Mathematics, University of Michigan, Ann Arbor, Michigan 48109)

  • Max Reppen

    (Department of Mathematics, ETH Zürich, 8092 Zürich, Switzerland)

Abstract

This review 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 how to simplify them in the small-cost limit. This allows one 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 more complex models, we present a policy iteration scheme that allows one to numerically compute the solution.

Suggested Citation

  • H. Mete Soner & Johannes Muhle-Karbe & Max Reppen, 2017. "A Primer on Portfolio Choice with Small Transaction Costs," Annual Review of Financial Economics, Annual Reviews, vol. 9(1), pages 301-331, November.
    • Handle: RePEc:anr:refeco:v:9:y:2017:p:301-331
    DOI: 10.1146/annurev-financial-110716-032445
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    More about this item

    Keywords

    asymptotic expansions; optimal investment and consumption; transaction costs; viscosity solutions;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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