Investment Strategies Under Transaction Cost

The Finite Horizon Case

Authors

  • Gerard Gennotte Universidad Autonoma de Barcelona
  • Alan Jung San Francisco State University

DOI:

https://doi.org/10.1016/1057-0810(95)90031-4

Abstract

The effect of proportional transaction costs on dynamic portfolio strategies for an agent who maximizes his expected utility of terminal wealth is examined. For portfolios composed of a single risky asset and a single riskless asset, Constantinides (1979) shows that the optimal investment policy is described in terms of a no transaction region, where the optimal policy is to refrain from trading if initial portfolio holdings lie within the region, and to transact to the nearest boundary of the region if portfolio holdings lie outside the region. An efficient and tractable algorithm is developed to obtain the boundaries, which are expressed as the ratio of the dollar holdings in stocks and bonds. The optimal trading strategies and utility levels are derived for a large set of realistic parameters. Management Science, March 1994, 40(3): 385-404. (Reprinted with permission of ABI/Inform, Copyright UMI.)

Published

1995-06-30

How to Cite

Gennotte , G., & Jung, A. (1995). Investment Strategies Under Transaction Cost: The Finite Horizon Case. Financial Services Review, 4(1), 65. https://doi.org/10.1016/1057-0810(95)90031-4

Issue

Vol. 4 No. 1 (1995): Financial Services Review

Section

Abstracts of Articles on Individual Financial Management

License

Copyright (c) 1995 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.