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A Primer on Portfolio Choice with Small Transaction Costs

Author

Listed:
  • Johannes Muhle-Karbe

    (University of Michigan)

  • Max Reppen

    (ETH Zurich)

  • Halil Mete Soner

    (ETH Zurich and Swiss Finance Institute)

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.

Suggested Citation

  • Johannes Muhle-Karbe & Max Reppen & Halil Mete Soner, 2016. "A Primer on Portfolio Choice with Small Transaction Costs," Swiss Finance Institute Research Paper Series 16-74, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1674
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2881374
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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