Optimal Investment of Merton Model for Multiple Investors with Frictions

Souhail Chebbi () and Senda Ounaies
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Souhail Chebbi: Research Chair of Financial and Actuarial Studies, Mathematics Department, College of Science, King Saud University, P.O. Box 2455, Riyadh 11451, Saudi Arabia
Senda Ounaies: Centre d’économie de la Sorbonne, Université Paris 1, Panthéon Sorbonne, 106–112 Boulevard de l’Hôpital, CEDEX 13, 75647 Paris, France

Mathematics, 2023, vol. 11, issue 13, 1-10

Abstract: We investigate the classical optimal investment problem of the Merton model in a discrete time with market friction due to loss of wealth in trading. We consider the case of a finite number of investors, with the friction for each investor represented by a convex penalty function. This model cover the transaction costs and liquidity models studied previously in the literature. We suppose that each investor maximizes their utility function over all controls that keep the value of the portfolio after liquidation non-negative. In the main results of this paper, we prove the existence of an optimal strategy of investment by using a new approach based on the formulation of an equivalent general equilibrium economy model via constructing a truncated economy, and the optimal strategy is obtained using a classical argument of limits.

Keywords: Merton model; multiple investors; penalty functions; general equilibrium; truncated economy; optimal strategy (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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