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Optimal Investment and Consumption With Two Bonds and Transaction Costs

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  • S. E. Shreve
  • H. M. Soner
  • G.-L. Xu

Abstract

An agent can invest in a high-yield bond and a low-yield bond, holding either long or short positions in either asset. Any movement of money between these two assets incurs a transaction cost proportional to the size of the transaction. the low-yield bond is liquid in the sense that wealth invested in this bond can be consumed directly without a transaction cost; wealth invested in the high-yield bond can be consumed only by first moving it into the low-yield bond. the problem of optimal consumption and investment on an infinite planning horizon is solved for a class of utility functions larger than the class of power functions. Copyright 1991 Blackwell Publishers.

Suggested Citation

  • S. E. Shreve & H. M. Soner & G.-L. Xu, 1991. "Optimal Investment and Consumption With Two Bonds and Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 1(3), pages 53-84.
  • Handle: RePEc:bla:mathfi:v:1:y:1991:i:3:p:53-84
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9965.1991.tb00016.x
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    Cited by:

    1. Akian, Marianne & Menaldi, Jose Luis & Sulem, Agn├Ęs, 1995. "Multi-asset portfolio selection problem with transaction costs," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 38(1), pages 163-172.
    2. repec:dau:papers:123456789/5374 is not listed on IDEAS
    3. Kogan, Leonid, 2001. "An equilibrium model of irreversible investment," Journal of Financial Economics, Elsevier, vol. 62(2), pages 201-245, November.
    4. Delgado, Francisco & Dumas, Bernard & Puopolo, Giovanni W., 2015. "Hysteresis bands on returns, holding period and transaction costs," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 86-100.

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