Financial Friction and Multiplicative Markov Market Game

Erik Aurell and Paolo Muratore-Ginanneschi

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Abstract: We study long-term growth-optimal strategies on a simple market with linear proportional transaction costs. We show that several problems of this sort can be solved in closed form, and explicit the non-analytic dependance of optimal strategies and expected frictional losses of the friction parameter. We present one derivation in terms of invariant measures of drift-diffusion processes (Fokker- Planck approach), and one derivation using the Hamilton-Jacobi-Bellman equation of optimal control theory. We also show that a significant part of the results can be derived without computation by a kind of dimensional analysis. We comment on the extension of the method to other sources of uncertainty, and discuss what conclusions can be drawn about the growth-optimal criterion as such.

Date: 1999-08
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Published in IJTAF Vol. 3, No. 3 (2000), 501-510

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