A Primer on Portfolio Choice with Small Transaction Costs

Johannes Muhle-Karbe, Max Reppen, H. Mete Soner

Research output: Contribution to journalReview article

6 Scopus citations

Abstract

This review 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 how to simplify them in the small-cost limit. This allows one 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 more complex models, we present a policy iteration scheme that allows one to numerically compute the solution.

Original languageEnglish (US)
Pages (from-to)301-331
Number of pages31
JournalAnnual Review of Financial Economics
Volume9
DOIs
StatePublished - Nov 1 2017
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Asymptotic expansions
  • Optimal investment and consumption
  • Transaction costs
  • Viscosity solutions

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