Article1998

Optimal Index Tracking Under Transaction Costs and Impulse Control

43 citations0/0 files storedInternational Journal of Theoretical and Applied Finance

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

Abstract

We apply impulse control techniques to a cash management problem within a mean-variance framework. We consider the strategy of an investor who is trying to minimise both fixed and proportional transaction costs, whilst minimising the tracking error with respect to an index portfolio. The cash weight is constantly fluctuating due to the stochastic inflow and outflow of dividends and liabilities. We show the existence of an optimal strategy and compute it numerically.

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References

2007Brownian Motion and Stochastic Calculus 1971Optimum consumption and portfolio rules in a continuous-time model 1990Portfolio Selection with Transaction Costs 1993Impulse Control Method and Exchange Rate 1983Impulse Control of Brownian Motion 1998Portfolio optimisation with strictly positive transaction costs and impulse control 1995Cash Management for Index Tracking 1997Optimal Impulse Control When Control Actions Have Random Consequences

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2015An efficient optimization approach for a cardinality-constrained index tracking problem 2002Optimal impulse control for cash management¶with quadratic holding-penalty costs 2017Index tracking and enhanced indexing using mixed conditional value-at-risk 2010A Computational Method for Stochastic Impulse Control Problems 2001OPTION PRICING FOR INCOMPLETE MARKETS VIA STOCHASTIC OPTIMIZATION: TRANSACTION COSTS, ADAPTIVE CONTROL AND FORECAST 2011Expectancy balance model for cash flow

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