TY - JOUR
T1 - Dynamic Portfolio Optimization with Transaction Costs and State-Dependent Drift
AU - Palczewski, Jan
AU - Poulsen, Rolf
AU - Schenk-Hoppe, Klaus Reiner
AU - Wang, Huamao
PY - 2015/6/16
Y1 - 2015/6/16
N2 - 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.
AB - 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.
U2 - 10.1016/j.ejor.2014.12.040
DO - 10.1016/j.ejor.2014.12.040
M3 - Journal article
SN - 0377-2217
VL - 243
SP - 921
EP - 931
JO - European Journal of Operational Research
JF - European Journal of Operational Research
IS - 3
ER -