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Dynamic portfolio optimization with transaction costs and state-dependent drift

Palczewski, Jan, Poulsen, Rolf, Schenk-Hoppé, Klaus Reiner, Wang, Huamao (2015) Dynamic portfolio optimization with transaction costs and state-dependent drift. European Journal of Operational Research, 243 (3). pp. 921-931. ISSN 0377-2217. (doi:10.1016/j.ejor.2014.12.040) (KAR id:41208)


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.

Item Type: Article
DOI/Identification number: 10.1016/j.ejor.2014.12.040
Uncontrolled keywords: Dynamic programming; Numerical methods; State-dependent drift; Transaction costs; Markov Chain approximation
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Q Science > Operations Research - Theory
Divisions: Divisions > Division of Computing, Engineering and Mathematical Sciences > School of Mathematics, Statistics and Actuarial Science
Divisions > Kent Business School - Division > Kent Business School (do not use)
Depositing User: Huamao Wang
Date Deposited: 29 May 2014 11:49 UTC
Last Modified: 16 Feb 2021 12:53 UTC
Resource URI: (The current URI for this page, for reference purposes)

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