The General Structure of Optimal Investment and Consumption with Small Transaction Costs

Jan Kallsen and Johannes Muhle-Karbe
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Jan Kallsen: Munich University of Technology
Johannes Muhle-Karbe: Imperial College London - Department of Mathematics

No 13-15, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We investigate the general structure of optimal investment and consumption with small proportional transaction costs. For a safe asset and a risky asset with general continuous dynamics, traded with random and time-varying but small transaction costs, we derive simple formal asymptotics for the optimal policy and welfare. These reveal the roles of the investors' preferences as well as the market and cost dynamics, and also lead to a fully dynamic model for the implied trading volume. In frictionless models that can be solved in closed form, explicit formulas for the leading-order corrections due to small transaction costs are obtained.

Keywords: transaction costs; optimal investment and consumption; trading volume; asymptotics (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2013-04
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1315

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