Balancing small fixed and proportional transaction cost in trading strategies

Jose V. Alcala and Arash Fahim

Papers from arXiv.org

Abstract: Transaction costs appear in financial markets in more than one form. There are several results in the literature on small proportional transaction cost and not that many on fixed transaction cost. In the present work, we heuristically study the effect of both types of transaction cost by focusing on a portfolio optimization. Here we assume the presence of fixed transaction cost and that there is a balance between fixed and proportional transaction cost, such that none of them dominates the other, asymptotically. We find out that the deviation of value function, when the fixed transaction cost is $\varepsilon$, from the Merton value function, without transaction cost, is of order $\varepsilon^1/2$ which is different from the pure proportional cost of $\varepsilon^2/3$. Based on this, we propose an expansion for the value function in terms of powers of $\varepsilon^1/2$.

Date: 2013-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://arxiv.org/pdf/1304.7562 Latest version (application/pdf)

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: https://EconPapers.repec.org/RePEc:arx:papers:1304.7562

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().