Maximizing the growth rate of a portfolio with fixed and proportional transaction costs

DOI10.1007/S00245-006-0857-2MaRDI QIDQ2432617zbMATH OpenOpenAlexFDO

Authors Takashi Tamura

Publication date 25 October 2006

Published in Applied Mathematics and Optimization (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s00245-006-0857-2

zbMATH Keywords

impulsive stochastic controlportfolio optimizationquasi-variational inequalities

Mathematics Subject Classification ID

Impulsive optimal control problems (49N25) Optimal stochastic control (93E20)

Review text

At the outset, the authors provide models of a market, transactions and transaction costs. Continuous transactions are not permitted since asset transactions are formulated as impulsive controls. In this regard, the assumption that rate costs are fixed has the effect of preventing such transactions. This set-up naturally leads to a portfolio optimization problem that takes the form of a stochastic control problem. The specific objective of the paper is to study the problem of maximizing the growth rate of the expected log utility. Here, a quasi-variational inequality (QVI) of ergodic type is derived from the optimization problem. In order to avoid degeneracy of a second order operator in the derived QVI, the authors introduce a co-ordinate transformation. In addition, a verification result for the solution of the QVI is solved via an optimal stopping time problem. To ultimately solve the QVI, the authors use a perturbation method that considers a necessary estimate of solutions of non-ergodic type QVIs by using a stochastic representation of the solutions.

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