Portfolio Optimization with Concave Transaction Costs
In this paper we study the optimal portfolio management for the constant relative-risk averse investor who maximizes an expected utility of his terminal wealth and who faces transaction costs during his trades. In our model the investor's portfolio consists of one risky and one risk-free asset, and we assume that the transaction cost is a concave function of the traded volume of the risky asset. We find that under such transaction cost formulation the optimal trading strategies and boundaries of the no-transaction region are different than those when transaction costs are proportional, i.e. when they are linear in the traded volume. When transaction costs are concave, we show that the no-transaction region is narrower than when transaction costs are proportional, and it is not a positive cone. Under our transaction cost formulation, when the investor's wealth is relatively high, the optimal trading strategy consists in bringing the post-trade portfolio position inside the no-transaction region, whereas proportional transaction costs induce the investor trading to the boundary of the no-transaction region. We also examine the impact of the risky asset volatility and the risk aversion parameter on the shape of the no-transaction region. When comparing different transaction cost structures, we show that the financial securities' market tends to be more liquid with concave transaction costs than with alternative cost specifications.
|Date of creation:||Dec 2002|
|Date of revision:|
|Contact details of provider:|| Postal: 40 bd. du Pont d'Arve, Case postale 3, CH - 1211 Geneva 4|
Phone: 41 22 / 312 09 61
Fax: 41 22 / 312 10 26
Web page: http://www.swissfinanceinstitute.ch
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- R. C. Merton, 1970.
"Optimum Consumption and Portfolio Rules in a Continuous-time Model,"
58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
- Constantinides, George M, 1986.
"Capital Market Equilibrium with Transaction Costs,"
Journal of Political Economy,
University of Chicago Press, vol. 94(4), pages 842-62, August.
- Ralf Korn, 1998. "Portfolio optimisation with strictly positive transaction costs and impulse control," Finance and Stochastics, Springer, vol. 2(2), pages 85-114.
- Dumas, Bernard & Luciano, Elisa, 1991. " An Exact Solution to a Dynamic Portfolio Choice Problem under Transactions Costs," Journal of Finance, American Finance Association, vol. 46(2), pages 577-95, June.
- C. Atkinson & P. Wilmott, 1995. "Portfolio Management With Transaction Costs: An Asymptotic Analysis Of The Morton And Pliska Model," Mathematical Finance, Wiley Blackwell, vol. 5(4), pages 357-367.
- Duffie, Darrell & Sun, Tong-sheng, 1990. "Transactions costs and portfolio choice in a discrete-continuous-time setting," Journal of Economic Dynamics and Control, Elsevier, vol. 14(1), pages 35-51, February.
When requesting a correction, please mention this item's handle: RePEc:fam:rpseri:rp103. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja)
If references are entirely missing, you can add them using this form.