An Exact Solution to a Dynamic Portfolio Choice Problem under Transaction Costs

Authors

  • Bernard Dumas University.of Pennsylvania and National Bureau of Economic Research
  • Elisa Luciano Universiti di Torino, Italy

DOI:

https://doi.org/10.1016/1057-0810(91)90047-3

Abstract

The presence of any friction in financial markets qualitatively changes the nature of the optimization problem faced by an investor. It requires one to either act or do nothing, an issue which, of course, does not arise in frictionless situations. The investor considered here accumulates wealth without consuming until some terminal point in time when he consumes all. His objective is to maximize the expected utility derived from that terminal consumption. We postpone the terminal point far into the future to obtain a stationary portfolio rule. The portfolio policy is in the form of two control barriers between which portfolio proportions are allowed to fluctuate. We show how to calculate them. Trle.Iournal @-Finance, Vol. XLVI, No. 2 (June 1991), pp. 577-95. (Reprinted with permission of The Journal ofFinance.)

Published

1991-12-30

How to Cite

Dumas , B., & Luciano , E. (1991). An Exact Solution to a Dynamic Portfolio Choice Problem under Transaction Costs. Financial Services Review, 1(2), 182–183. https://doi.org/10.1016/1057-0810(91)90047-3

Issue

Vol. 1 No. 2 (1991): Financial Services Review

Section

Abstracts of Articles on Individual Financial Management

License

Copyright (c) 1991 JAI Press Inc.

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Author(s) retain copyright and grant the Journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-NonCommercial 4.0 International License that allows to share the work with an acknowledgment of the work's authorship and initial publication in this Journal.

This license allows the author to remix, tweak, and build upon the original work non-commercially. The new work(s) must be non-commercial and acknowledge the original work.