EconPapers    
Economics at your fingertips  
 

Smooth investment

Kenneth Bruhn (), Ninna Reitzel Jensen () and Mogens Steffensen ()
Additional contact information
Kenneth Bruhn: University of Copenhagen
Ninna Reitzel Jensen: University of Copenhagen
Mogens Steffensen: University of Copenhagen

Annals of Finance, 2016, vol. 12, issue 3, No 3, 335-361

Abstract: Abstract In the classical portfolio optimization problem considered by Merton, the resulting constant proportion investment plan requires a diffusive trading strategy. This means that, within any arbitrarily small time interval, the investor must impractically both buy and sell stocks. We study the problems of a mean-square and a power utility investor for whom the trading strategy is constrained to be smooth, i.e. nondiffusive. This means that over sufficiently small time intervals, the investor is either a seller or a buyer of stocks. The mathematical framework is built around quadratic objectives such that trading activity is punished quadratically. Mean-square utility is quadratic, and power utility is covered by quadratic punishment of distance to Merton’s power utility portfolio. We present semi-explicit solutions and, in a series of numerical illustrations, show the impact of trading constraints on the portfolio decision over the investment horizon.

Keywords: Smooth investment; Diffusive trading; Trading costs; Power utility; Mean-square utility (search for similar items in EconPapers)
JEL-codes: C61 D11 D81 G11 G12 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://link.springer.com/10.1007/s10436-016-0283-7 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:annfin:v:12:y:2016:i:3:d:10.1007_s10436-016-0283-7

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/10436/PS2

DOI: 10.1007/s10436-016-0283-7

Access Statistics for this article

Annals of Finance is currently edited by Anne Villamil

More articles in Annals of Finance from Springer
Bibliographic data for series maintained by Sonal Shukla ().

 
Page updated 2020-04-23
Handle: RePEc:kap:annfin:v:12:y:2016:i:3:d:10.1007_s10436-016-0283-7