Multiple Risky Assets, Transaction Costs and Return Predictability: Implications for Portfolio Choice

50 Pages Posted: 3 Nov 2008

See all articles by Anthony W. Lynch

Anthony W. Lynch

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Sinan Tan

New York University (NYU) - Department of Finance

Multiple version iconThere are 4 versions of this paper

Date Written: December 2002

Abstract

Our paper contributes to the dynamic portfolio choice and transaction cost literatures by considering a multiperiod CRRA individual who faces transaction costs and who has access to multiple risky assets, all with predictable returns. We numerically solve the individual's multiperiod problem in the presence of transaction costs and predictability. In particular, we characterize the investor's optimal portfolio choice with proportional and fixed transaction costs, and with return predictability similar to that observed for the U.S. stock market. We also perform some comparative statics to better understand the nature of the no-trade region with more than one risky asset. Throughout our focus is on the case with two risky assets. We also perform some utility comparisons. The calibration exercise reveals some interesting results about the relative attractiveness of the three equity portfolios calibrated.

Suggested Citation

Lynch, Anthony W. and Tan, Sinan, Multiple Risky Assets, Transaction Costs and Return Predictability: Implications for Portfolio Choice (December 2002). NYU Working Paper No. FIN-02-063, Available at SSRN: https://ssrn.com/abstract=1294435

Anthony W. Lynch (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
(212) 998-0350 (Phone)
(212) 995-4233 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sinan Tan

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0560 (Phone)

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