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2006•Journal of Tsinghua University(Science and Technology)Requires access

Optimal Portfolio Choice Under Transaction Cost

Dongyan Ye

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Abstract

General portfolio choice and asset pricing models don't consider the transaction cost's influence,but we can drop this factor only when its effect is 2nd or higher order.Previous models rarely consider portfolio choice with transaction cost.This paper discusses the problem of the agent how to choose portfolio with fixed transaction cost,including discrete and dynamic cases.In particularly,in the continuous case,the paper analyzes how the assets' expected return,volatility,Sharpe ratio and transaction cost impact the agent's portfolio choice and utility, and then determine the agents' portfolio choice.

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What this paper is about

General portfolio choice and asset pricing models don't consider the transaction cost's influence,but we can drop this factor only when its effect is 2nd or higher order.Previous models rarely consider portfolio choice with transaction cost.This paper discusses the problem of the agent how to choose portfolio with fixed transaction cost,including discrete and dynamic cases.In particularly,in the continuous case,the paper analyzes how the assets' expected return,volatility,Sharpe ratio and transaction cost impact the agent's portfolio choice and utility, and then determine the agents' portfolio choice.

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Available abstract

General portfolio choice and asset pricing models don't consider the transaction cost's influence,but we can drop this factor only when its effect is 2nd or higher order.Previous models rarely consider portfolio choice with transaction cost.This paper discusses the problem of the agent how to choose portfolio with fixed transaction cost,including discrete and dynamic cases.In particularly,in the continuous case,the paper analyzes how the assets' expected return,volatility,Sharpe ratio and transaction cost impact the agent's portfolio choice and utility, and then determine the agents' portfolio choice.

Key concepts: Portfolio, Transaction cost, Merton's portfolio problem, Portfolio optimization, Replicating portfolio, Application portfolio management, Volatility (finance), Sharpe ratio

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