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Optimal Investment for Retail Investors with Flooredand Capped Costs

Author

Listed:
  • Christoph Belak
  • Lukas Mich
  • Frank T. Seifried

Abstract

We study optimal portfolio decisions for a retail investor that faces proportional costs which are oored and capped at some minimal and maximal cost levels, respectively, in a classical Black-Scholes market. We provide a construction of optimal trading strategies and characterize the value function as the unique viscosity solution of the associated quasi-variational inequalities. Moreover, we numerically investigate the optimal trading regions and a distinct structure: Theno-trading region is vVv-shaped, and all optimal trades for small (large) levels of wealth incur the oored (capped) cost; proportional cost trades occur only in anarrow intermediate wealth regime.

Suggested Citation

  • Christoph Belak & Lukas Mich & Frank T. Seifried, 2019. "Optimal Investment for Retail Investors with Flooredand Capped Costs," Working Paper Series 2019-06, University of Trier, Research Group Quantitative Finance and Risk Analysis.
  • Handle: RePEc:trr:qfrawp:201906
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    File URL: https://www.uni-trier.de/fileadmin/fb4/prof/BWL/FIN/QFRA_Working_Papers/QFRA_19-06.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Portfolio Optimization; Transaction Costs; Retail Investor;
    All these keywords.

    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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