A Primer on Portfolio Choice with Small Transaction Costs

H. Mete Soner (), Johannes Muhle-Karbe () and Max Reppen ()
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H. Mete Soner: Department of Mathematics, ETH Zürich, 8092 Zürich, Switzerland
Johannes Muhle-Karbe: Department of Mathematics, University of Michigan, Ann Arbor, Michigan 48109
Max Reppen: Department of Mathematics, ETH Zürich, 8092 Zürich, Switzerland

Annual Review of Financial Economics, 2017, vol. 9, issue 1, 301-331

Abstract: This review is an introduction to asymptotic methods for portfolio choice problems with small transaction costs. We outline how to derive the corresponding dynamic programming equations and how to simplify them in the small-cost limit. This allows one to obtain explicit solutions in a wide range of settings, which we illustrate for a model with mean-reverting expected returns and proportional transaction costs. For more complex models, we present a policy iteration scheme that allows one to numerically compute the solution.

Keywords: asymptotic expansions; optimal investment and consumption; transaction costs; viscosity solutions (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2017
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