The general structure of optimal investment and consumption with small transaction costs
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Publication:5283400
DOI10.1111/MAFI.12106zbMATH Open1423.91006arXiv1303.3148OpenAlexW3125973117MaRDI QIDQ5283400FDOQ5283400
Johannes Muhle-Karbe, Jan Kallsen
Publication date: 21 July 2017
Published in: Mathematical Finance (Search for Journal in Brave)
Abstract: We investigate the general structure of optimal investment and consumption with small proportional transaction costs. For a safe asset and a risky asset with general continuous dynamics, traded with random and time-varying but small transaction costs, we derive simple formal asymptotics for the optimal policy and welfare. These reveal the roles of the investors' preferences as well as the market and cost dynamics, and also lead to a fully dynamic model for the implied trading volume. In frictionless models that can be solved in closed form, explicit formulas for the leading-order corrections due to small transaction costs are obtained.
Full work available at URL: https://arxiv.org/abs/1303.3148
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