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A Primer on Portfolio Choice with Small Transaction Costs

32 Pages Posted: 7 Dec 2016  

Johannes Muhle-Karbe

Carnegie Mellon University - Department of Mathematical Sciences

Max Reppen

ETH Zurich

Halil Mete Soner

ETH Zürich; Swiss Finance Institute

Date Written: December 2, 2016

Abstract

This survey is an introduction to asymptotic methods for portfolio-choice problems with small transaction costs. We outline how to derive the corresponding dynamic programming equations and simplify them in the small-cost limit. This allows to obtain explicit solutions in a wide range of settings, which we illustrate for a model with mean-reverting expected returns and proportional transaction costs. For even more complex models, we present a policy iteration scheme that allows to compute the solution numerically.

JEL Classification: G11 and C61

Suggested Citation

Muhle-Karbe, Johannes and Reppen, Max and Soner, Halil Mete, A Primer on Portfolio Choice with Small Transaction Costs (December 2, 2016). Swiss Finance Institute Research Paper No. 16-74. Available at SSRN: https://ssrn.com/abstract=2881374

Johannes Muhle-Karbe

Carnegie Mellon University - Department of Mathematical Sciences ( email )

Pittsburgh, PA 15213-3890
United States

Max Reppen

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Halil Mete Soner (Contact Author)

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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