Preprintgreen2013

Portfolio Optimization under Small Transaction Costs: a Convex Duality Approach

20 citations0/0 files storedRePEc: Research Papers in Economics

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Stochastic processes and financial applications Financial Markets and Investment Strategies Risk and Portfolio Optimization

Abstract

We consider an investor with constant absolute risk aversion who trades a risky asset with general Ito dynamics, in the presence of small proportional transaction costs. Kallsen and Muhle-Karbe (2012) formally derived the leading-order optimal trading policy and the associated welfare impact of transaction costs. In the present paper, we carry out a convex duality approach facilitated by the concept of shadow price processes in order to verify the main results of Kallsen and Muhle-Karbe under well-defined regularity conditions.

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References

2005Stochastic Integration and Differential Equations 2003Limit Theorems for Stochastic Processes 1991Continuous Martingales and Brownian Motion 1996Handbook of Brownian Motion — Facts and Formulae 1979Calcul Stochastique et Problèmes de Martingales 2002Handbook of Brownian Motion - Facts and Formulae 1991Martingale and Duality Methods for Utility Maximization in an Incomplete Market 1994Optimal Investment and Consumption with Transaction Costs

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