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A Unified Approach to Portfolio Optimization with Linear Transaction Costs

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  • Valeri Zakamouline

    (Bodoe Graduate School of Business)

Abstract

In this paper we study the continuous time optimal portfolio selection problem for an investor with a finite horizon who maximizes expected utility of terminal wealth and faces transaction costs in the capital market. It is well known that, depending on a particular structure of transaction costs, such a problem is formulated and solved within either stochastic singular control or stochastic impulse control framework. In this paper we propose a unified framework, which generalizes the contemporary approaches and is capable to deal with any problem where transaction costs are a linear/piecewise-linear function of the volume of trade. We also discuss some methods for solving numerically the problem within our unified framework.

Suggested Citation

  • Valeri Zakamouline, 2004. "A Unified Approach to Portfolio Optimization with Linear Transaction Costs," GE, Growth, Math methods 0404003, University Library of Munich, Germany, revised 28 Apr 2004.
    • Handle: RePEc:wpa:wuwpge:0404003
    Note: Type of Document - pdf; pages: 36
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    References listed on IDEAS

    as
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    13. Valeri Zakamouline, 2003. "American Option Pricing with Transaction Costs," Finance 0311012, University Library of Munich, Germany.
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    More about this item

    Keywords

    portfolio choice; transaction costs; stochastic singular control; stochastic impulse control; computational methods;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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