IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Optimal Dynamic Trading with Leverage Constraints

Listed author(s):
  • Sanford J. Grossman
  • Jean-Juc Vila

We solve for the optimal dynamic trading strategy of an investor who faces two constraints. The first constraint is a limitation on his ability to borrow for the purpose of investing in a risky asset, i.e., the market value of his investments in the risky asset X, must be less than an exogenously given function of his wealth X(W). The second constraint is the requirement that the investor’s wealth be non-negative at all times, i.e., Wt>O. We assume that the investor has constant relative risk aversion A, and the value of the risky asset follows a diffusion with drift m+r (where r is the risk free rate) and per unit time variance s2. In the absence of the constraints, X &Mac186; (m/s2)*W/A. We prove that in the presence of the above constraints the optimal investment is X &Mac186; Min[(m/s2)*W/a, X(W)]. The coefficient a is not in general equal to A, and represents the extent to which the investor alters his strategy even when the constraints are not binding because of the possibility that the constraints will become binding in the future.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 36-89.

in new window

Date of creation:
Handle: RePEc:fth:pennfi:36-89
Contact details of provider: Postal:
3254 Steinberg Hall-Dietrich Hall, Philadelphia, PA 19104-6367

Phone: (215) 898-7616
Fax: (215) 573-8084
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fth:pennfi:36-89. 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: (Thomas Krichel)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.