Hereditary Portfolio Optimization with Taxes and Fixed Plus Proportional Transaction Costs—Part I | Zendy

Mou-Hsiung Chang | Zendy

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Hereditary Portfolio Optimization with Taxes and Fixed Plus Proportional Transaction Costs—Part I

Author(s) -

Mou-Hsiung Chang

Publication year - 2007

Publication title -

journal of applied mathematics and stochastic analysis

Language(s) - English

Resource type - Journals

eISSN - 1687-2177

pISSN - 1048-9533

DOI - 10.1155/2007/82753

Subject(s) - hamilton–jacobi–bellman equation , bellman equation , portfolio optimization , portfolio , merton's portfolio problem , viscosity solution , mathematics , transaction cost , variational inequality , mathematical optimization , stochastic control , optimization problem , mathematical economics , economics , replicating portfolio , optimal control , microeconomics , finance

This is the first of the two companion papers which treat aninfinite time horizon hereditary portfolio optimization problem in a marketthat consists of one savings account and one stock account. Within the solvency region, the investor is allowed to consume from the savings account and can make transactions between the two assets subject to paying capital gain taxes as well as a fixed plus proportional transaction cost. The investor is to seek an optimal consumption-trading strategy in order to maximize the expected utility from the total discounted consumption.The portfolio optimization problem is formulated as an infinite dimensionalstochastic classical-impulse control problem. The quasi-variational HJB inequality(QVHJBI) for the value function is derived in this paper. The second paper contains the verification theorem for the optimal strategy. It is also shown there that the value function is a viscosity solution of the QVHJBI

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