Optimal Investment for Retail Investors with Floored and Capped Costs

33 Pages Posted: 3 Sep 2019

See all articles by Christoph Knochenhauer

Christoph Knochenhauer

Technische Universität München (TUM)

Lukas Mich

University of Trier

Frank Thomas Seifried

University of Trier

Date Written: September 3, 2019

Abstract

We study optimal portfolio decisions for a retail investor that faces proportional costs which are floored and capped at some minimal and maximal cost levels, respectively, in a classical Black-Scholes market. We provide a construction of optimal trading strategies and characterize the value function as the unique viscosity solution of the associated quasi-variational inequalities. Moreover, we numerically investigate the optimal trading regions and find a distinct structure: The no-trading region is vVv-shaped, and all optimal trades for small (large) levels of wealth incur the floored (capped) cost; proportional cost trades occur only in a narrow intermediate wealth regime.

Keywords: Portfolio Optimization, Transaction Costs, Retail Investor

JEL Classification: G11, C61

Suggested Citation

Knochenhauer, Christoph and Mich, Lukas and Seifried, Frank Thomas, Optimal Investment for Retail Investors with Floored and Capped Costs (September 3, 2019). Available at SSRN: https://ssrn.com/abstract=3447346 or http://dx.doi.org/10.2139/ssrn.3447346

Christoph Knochenhauer (Contact Author)

Technische Universität München (TUM) ( email )

Parkring 11
Garching bei München, 85748
Germany

Lukas Mich

University of Trier ( email )

15, Universitaetsring
Trier, 54286
Germany

Frank Thomas Seifried

University of Trier ( email )

Department IV - Mathematics
Universitätsring 19
Trier, 54296
Germany

HOME PAGE: http://sites.google.com/site/seifriedfinance/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
151
Abstract Views
1,392
Rank
361,774
PlumX Metrics