Investment Strategies Under Transaction Cost
The Finite Horizon Case
DOI:
https://doi.org/10.1016/1057-0810(95)90031-4Abstract
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.)
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