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Singular Perturbation Expansion for Utility Maximization with Order-$\epsilon$ Quadratic Transaction Costs

Andrew Papanicolaou and Shiva Chandra

Papers from arXiv.org

Abstract: We present an expansion for portfolio optimization in the presence of small, instantaneous, quadratic transaction costs. Specifically, the magnitude of transaction costs has a coefficient that is of the order $\epsilon$ small, which leads to the optimization problem having an asymptotically-singular Hamilton-Jacobi-Bellman equation whose solution can be expanded in powers of $\sqrt\epsilon$. In this paper we derive explicit formulae for the first two terms of this expansion. Analysis and simulation are provided to show the behavior of this approximating solution.

New Economics Papers: this item is included in nep-upt
Date: 2019-10, Revised 2019-11
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