A Primer on Portfolio Choice with Small Transaction Costs

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

doi:10.1146/annurev-financial-110716-032445

A Primer on Portfolio Choice with Small Transaction Costs

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

Research output: Contribution to journal › Review article › peer-review

14 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 language	English (US)
Pages (from-to)	301-331
Number of pages	31
Journal	Annual Review of Financial Economics
Volume	9
DOIs	https://doi.org/10.1146/annurev-financial-110716-032445
State	Published - Nov 1 2017
Externally published	Yes

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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10.1146/annurev-financial-110716-032445

Cite this

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AU - Reppen, Max

AU - Soner, H. Mete

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N2 - 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.

AB - 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.

KW - Asymptotic expansions

KW - Optimal investment and consumption

KW - Transaction costs

KW - Viscosity solutions

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JO - Annual Review of Financial Economics

JF - Annual Review of Financial Economics

ER -

A Primer on Portfolio Choice with Small Transaction Costs

Abstract

All Science Journal Classification (ASJC) codes

Keywords

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