Investment Strategies under Transaction Costs: The Finite Horizon Case

Abstract

We examine the effect of proportional transaction costs on dynamic portfolio strategies for an agent who maximizes his expected utility of terminal wealth. For portfolios composed of a single risky asset and a single riskless asset, Constantinides (1979) shows that the optimal investment policy is described in terms of a no transaction region, where the optimal policy is to refrain from trading if initial portfolio holdings lie within the region, and to transact to the nearest boundary of the region if portfolio holdings lie outside the region. Because the boundaries could not be derived analytically, we developed an efficient and tractable algorithm to obtain the boundaries, which are expressed as the ratio of the dollar holdings in stocks and bonds. We considered two cases: the same transaction costs for the two assets, and costs incurred on only the risky asset. We derived the optimal trading strategies and utility levels for a large set of realistic parameters. In particular, we show that the no transaction region narrows and converges rapidly to the infinite horizon limit as the time horizon increases.optimal portfolio, transaction costs, optimal rebalancing, liquidation costs, power utility

Asset Prices in General Equilibrium with Recursive Utility and Illiquidity Induced by Transactions Costs

“…8 This includes the work in Davis and Norman (1990), Dumas and Luciano (1991), Gennotte and Jung (1994), Bertsimas and Lo (1998), Schroder (1998), Balduzzi and Lynch (1999), Lynch and Balduzzi (2000), Liu and Loewenstein (2002), Liu (2004), and Garleânu and Pedersen (2013). See also Ang, Papanikolaou, identify the "region of no-trade" where, because of transaction costs, an investor finds it optimal not to rebalance her portfolio even though asset prices have changed.…”

Optimal Asset Allocation With Transaction Costs

“…Leland [7] Leland [7] Gennotte and Jung [5] Leland [7] CRRA ( ) (Gennotte and Jung [5], Liu and Loewenstein [8])…”

Smoothing and Regularization for Mixed-Integer Second-Order Cone Programming with Applications in Portfolio Optimization

“…• About two decades ago, transaction costs were started to be taken into account by [24,31,48] in portfolio optimization problems. In [62], Yoshimoto models V-shaped transaction cost function in the mean-variance portfolio optimization framework.…”