Optimal Consumption and Investment with Transaction Costs and Multiple Risky Assets

Hong Liu

Journal of Finance, 2004, vol. 59, issue 1, pages 289-338

Abstract: We consider the optimal intertemporal consumption and investment policy of a constant absolute risk aversion (CARA) investor who faces fixed and proportional transaction costs when trading multiple risky assets. We show that when asset returns are uncorrelated, the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds, to trade to the corresponding optimal targets. An extensive analysis suggests that transaction cost is an important factor in affecting trading volume and that it can significantly diminish the importance of stock return predictability as reported in the literature. Copyright 2004 by The American Finance Association.

Date: 2004
View citations in EconPapers

Downloads: (external link)
http://www.blackwell-synergy.com/servlet/useragent ... &year=2004&part=null link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:bla:jfinan:v:59:y:2004:i:1:p:289-338

Ordering information: This journal article can be ordered from
http://www.afajof.org/membership/join.asp

Access Statistics for this article

Journal of Finance is edited by Robert F. Stambaugh

More articles in Journal of Finance from American Finance Association
Contact information at EDIRC.
Series data maintained by Christopher F. Baum ().