Asymptotic Methods for Transaction Costs

Eberhard Mayerhofer ()
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Eberhard Mayerhofer: Department of Mathematics & Statistics, University of Limerick, V94 T9PX Limerick, Ireland

Risks, 2024, vol. 12, issue 4, 1-32

Abstract: We propose a general approximation method for the determination of optimal trading strategies in markets with proportional transaction costs, with a polynomial approximation of the residual value function. The method is exemplified by several problems, from optimally tracking benchmarks and hedging the log contract to maximizing utility from terminal wealth. Strategies are also approximated by practically executable, discrete trades. We identify the necessary trade-off between the trading frequency and trade size to ensure satisfactory agreement with the theoretically optimal, continuous strategies of infinite activity.

Keywords: transaction costs; portfolio choice; shadow prices; reflected diffusions; asymptotics (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2024
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