 Dynamic portfolio choice with return predictability and transaction costsGuiyuan Ma, Chi Chung Siu and Song-Ping Zhu European Journal of Operational Research, 2019, vol. 278, issue 3, 976-988 Abstract: We derive a closed-form solution to a continuous-time optimal portfolio selection problem with return predictability and transaction costs. Specifically, we assume that asset returns are predicted by stochastic signals, and that transaction costs are of quadratic form. The agent chooses a trading strategy to maximize the expected exponential utility of his terminal wealth. Our feedback trading strategy indicates that the agent should trade gradually toward a dynamic aim portfolio, which is a weighted sum of the expected future Merton portfolios. The agent’s aim portfolio converges to the Merton portfolio as time approaches the terminal date. Our analysis offers new insights to the existing literature. First, our optimal trading strategy is affected by the volatility of return-predicting factors, while such an effect is absent in Gârleanu and Pedersen (2016). Secondly, the agent invests more into the assets with more persistent signals and with less transaction costs. Keywords: Finance; Continuous-time portfolio choice; Return predictability; Linear price impact; Quadratic transaction cost (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:278:y:2019:i:3:p:976-988 DOI: 10.1016/j.ejor.2019.05.009 Access Statistics for this article European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati More articles in European Journal of Operational Research from Elsevier |
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