Dynamic portfolio optimization with transaction costs and state-dependent drift

Palczewski, Jan; Poulsen, Rolf; Schenk-Hopp�, Klaus Reiner; Wang, Huamao

Abstract

© 2015 Elsevier B.V. All rights reserved. The problem of dynamic portfolio choice with transaction costs is often addressed by constructing a Markov Chain approximation of the continuous time price processes. Using this approximation, we present an efficient numerical method to determine optimal portfolio strategies under time- and state-dependent drift and proportional transaction costs. This scenario arises when investors have behavioral biases or the actual drift is unknown and needs to be estimated. Our numerical method solves dynamic optimal portfolio problems with an exponential utility function for time-horizons of up to 40 years. It is applied to measure the value of information and the loss from transaction costs using the indifference principle.

Citation

Palczewski, J., Poulsen, R., Schenk-Hoppé, K. R., & Wang, H. (2015). Dynamic portfolio optimization with transaction costs and state-dependent drift. European Journal of Operational Research, 243(3), 921-931. https://doi.org/10.1016/j.ejor.2014.12.040

• Journal Article Type: Article
• Acceptance Date: Dec 21, 2014
• Online Publication Date: Dec 31, 2014
• Publication Date: 2015-06
• Deposit Date: Apr 7, 2020
• Publicly Available Date: Apr 17, 2020
• Journal: European Journal of Operational Research
• Print ISSN: 0377-2217
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 243
• Issue: 3
• Pages: 921-931
• DOI: https://doi.org/10.1016/j.ejor.2014.12.040
• Public URL: https://nottingham-repository.worktribe.com/output/4267087
• Publisher URL: https://www.sciencedirect.com/science/article/abs/pii/S0377221714010583?via%3Dihub
• Additional Information: This article is maintained by: Elsevier; Article Title: Dynamic portfolio optimization with transaction costs and state-dependent drift; Journal Title: European Journal of Operational Research; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.ejor.2014.12.040; Content Type: article; Copyright: Copyright © 2015 Elsevier B.V. All rights reserved.