Singular perturbation expansion for utility maximization with order- quadratic transaction costs

DOI10.1142/S0219024919500390MaRDI QIDQ5207494zbMATH OpenOpenAlexFDO

Authors Shiva Chandra, Andrew Papanicolaou

Publication date 2 January 2020

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1910.06463

zbMATH Keywords

aim portfolioMerton problemorder bookquadratic penaltysingular perturbation expansionstochastic controltransaction costs

Mathematics Subject Classification ID

Portfolio theory (91G10) Optimal stochastic control (93E20)

Abstract: We present an expansion for portfolio optimization in the presence of small, instantaneous, quadratic transaction costs. Specifically, the magnitude of transaction costs has a coefficient that is of the order $epsilon$ small, which leads to the optimization problem having an asymptotically-singular Hamilton-Jacobi-Bellman equation whose solution can be expanded in powers of $sqrtepsilon$. In this paper we derive explicit formulae for the first two terms of this expansion. Analysis and simulation are provided to show the behavior of this approximating solution.

Recommendations

• Homogenization and asymptotics for small transaction costs
• Optimal portfolio selection with transaction costs
• Asymptotic Analysis for Optimal Investment in Finite Time with Transaction Costs
• Perturbation solution of optimal portfolio theory with transaction costs for any utility function
• Asymptotic analysis of optimal investment and consumption with transaction costs.

Cites work

• Controlled Markov processes and viscosity solutions
• FROM THE IMPLIED VOLATILITY SKEW TO A ROBUST CORRECTION TO BLACK-SCHOLES AMERICAN OPTION PRICES
• Hedging with temporary price impact
• Homogenization of viscous and non-viscous HJ equations: a remark and an application
• scientific article; zbMATH DE number 2148962 (Why is no real title available?)
• Liquidity risk and arbitrage pricing theory
• Markets with transaction costs. Mathematical theory.
• Multiscale stochastic volatility for equity, interest rate, and credit derivatives.
• Optimal investment and consumption with transaction costs
• OPTIMAL INVESTMENT STRATEGIES FOR CONTROLLING DRAWDOWNS
• Portfolio Selection with Transaction Costs
• Remarks on the existence and uniqueness of unbounded viscosity solutions of Hamilton-Jacobi equations
• The cost of illiquidity and its effects on hedging

Cited in

(2)

• Quadratic expansions in optimal investment with respect to perturbations of the semimartingale model
• Asymptotic analysis for target asset portfolio allocation with small transaction costs

This page was built for publication: Singular perturbation expansion for utility maximization with order-\(\epsilon\) quadratic transaction costs

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q5207494)