Optimal Investment and Consumption with Fixed and Proportional Transaction Costs

Hong Liu
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Hong Liu: The Olin School of Business, Washington University, St. Louis, MO 63130, USA

Chapter 6 in Recent Developments in Mathematical Finance, 2001, pp 60-71 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe consider the optimal investment and consumption policy for a constant absolute risk averse investor who faces fixed and/or proportional transaction costs when trading a stock and maximizes his expected utility from intertemporal consumption. We show that the Hamilton-Jacobi-Bellman PDE with free boundaries can be reduced to an ODE, which greatly simplifies the problem. Using the stochastic impulse and singular control techniques, we then derive the optimal investment and consumption policy. In particular, when there are both fixed and proportional costs, it is shown that the optimal stock investment policy is to keep the dollar amount invested in the stock between two constant levels and upon reaching these two thresholds, the investor jumps to the corresponding optimal target level.

Keywords: Proceedings; Conference; Mathematical Finance; Shanghai (China) (search for similar items in EconPapers)
Date: 2001
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