A Unified Approach to Portfolio Optimization with Linear Transaction Costs

Bodoe Graduate School of Business Working Paper No. 3/2004

28 Pages Posted: 4 Feb 2010 Last revised: 8 Feb 2010

Valeriy Zakamulin

University of Agder - School of Business and Law

Date Written: October 6, 2004

Abstract

In this paper we study the continuous time optimal portfolio selection problem for an investor with a finite horizon who maximizes expected utility of terminal wealth and faces transaction costs in the capital market. It is well known that, depending on a particular structure of transaction costs, such a problem is formulated and solved within either stochastic singular control or stochastic impulse control framework. In this paper we propose a unified framework, which generalizes the contemporary approaches and is capable to deal with any problem where transaction costs are a linear/piecewise-linear function of the volume of trade. We also discuss some methods for solving numerically the problem within our unified framework.

Keywords: portfolio choice, transaction costs, stochastic singular control, stochastic impulse control, computational methods

JEL Classification: C61, C63, G11

Suggested Citation

Zakamulin, Valeriy, A Unified Approach to Portfolio Optimization with Linear Transaction Costs (October 6, 2004). Bodoe Graduate School of Business Working Paper No. 3/2004. Available at SSRN: https://ssrn.com/abstract=531362 or http://dx.doi.org/10.2139/ssrn.531362

Valeriy Zakamulin (Contact Author)

University of Agder - School of Business and Law ( email )

Service Box 422
Kristiansand, N-4604
Norway
+47 38141039 (Phone)

HOME PAGE: http://vzakamulin.weebly.com/

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