Portfolio Selection with Transaction Costs | Zendy

Mark H. Davis | Zendy; A. R. Norman | Zendy

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Portfolio Selection with Transaction Costs

Author(s) -

Mark H. Davis,

A. R. Norman

Publication year - 1990

Publication title -

mathematics of operations research

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 1.619

H-Index - 83

eISSN - 1526-5471

pISSN - 0364-765X

DOI - 10.1287/moor.15.4.676

Subject(s) - portfolio , stock (firearms) , transaction cost , database transaction , mathematics , econometrics , stock price , nonlinear system , mathematical optimization , mathematical economics , economics , microeconomics , finance , computer science , series (stratigraphy) , mechanical engineering , programming language , engineering , paleontology , physics , quantum mechanics , biology

In this paper, optimal consumption and investment decisions are studied for an investor who has available a bank account paying a fixed rate of interest and a stock whose price is a log-normal diffusion. This problem was solved by Merton and others when transactions between bank and stock are costless. Here we suppose that there are charges on all transactions equal to a fixed percentage of the amount transacted. It is shown that the optimal buying and selling policies are the local times of the two-dimensional process of bank and stock holdings at the boundaries of a wedge-shaped region which is determined by the solution of a nonlinear free boundary problem. An algorithm for solving the free boundary problem is given.

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