32 Pages Posted: 7 Dec 2016
Date Written: December 2, 2016
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: 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