Optimal Portfolio Selection with Transaction Costs

Phelim Boyle and Xiaodong Lin

North American Actuarial Journal, 1997, vol. 1, issue 2, 27-39

Abstract: This paper examines the lifetime portfolio-selection problem in the presence of transaction costs. Using a discrete time approach, we develop analytical expressions for the investor's indirect utility function and also for the boundaries of the no-transactions region. The economy consists of a single risky asset and a riskless asset. Transactions in the risky asset incur proportional transaction costs. The investor has a power utility function and is assumed to maximize expected utility of end-of-period wealth. We illustrate the solution procedure in the case in which the returns on the risky asset follow a multiplicative binomial process. Our paper both complements and extends the recent work by Gennotte and Jung (1994), which used numerical approximations to tackle this problem.

Date: 1997
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DOI: 10.1080/10920277.1997.10595602

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