Related papers: Rebalancing with Linear and Quadratic Costs
This paper considers the finite horizon portfolio rebalancing problem in terms of mean-variance optimization, where decisions are made based on current information on asset returns and transaction costs. The study's novelty is that the…
We study risk-sharing economies where heterogenous agents trade subject to quadratic transaction costs. The corresponding equilibrium asset prices and trading strategies are characterised by a system of nonlinear, fully-coupled…
We study how trading costs are reflected in equilibrium returns. To this end, we develop a tractable continuous-time risk-sharing model, where heterogeneous mean-variance investors trade subject to a quadratic transaction cost. The…
We consider a continuous-time market with proportional transaction costs. Under appropriate assumptions we prove the existence of optimal strategies for investors who maximize their worst-case utility over a class of possible models. We…
In a market with one safe and one risky asset, an investor with a long horizon, constant investment opportunities, and constant relative risk aversion trades with small proportional transaction costs. We derive explicit formulas for the…
When trading incurs proportional costs, leverage can scale an asset's return only up to a maximum multiple, which is sensitive to its volatility and liquidity. In a model with one safe and one risky asset, with constant investment…
An investor with constant relative risk aversion and an infinite planning horizon trades a risky and a safe asset with constant investment opportunities, in the presence of small transaction costs and a binding exogenous portfolio…
We study the problem of option pricing and hedging strategies within the frame-work of risk-return arguments. An economic agent is described by a utility function that depends on profit (an expected value) and risk (a variance). In the…
In this short note, we consider mean-variance optimized portfolios with transaction costs. We show that introducing quadratic transaction costs makes the optimization problem more difficult than using linear transaction costs. The reason…
An investor with constant relative risk aversion trades a safe and several risky assets with constant investment opportunities. For a small fixed transaction cost, levied on each trade regardless of its size, we explicitly determine the…
Transaction costs play a critical role in asset allocation and consumption strategies in portfolio management. We apply the methods of dynamic programming and singular perturbation expansion to derive the closed-form leading solutions to…
An investor trades a safe and several risky assets with linear price impact to maximize expected utility from terminal wealth. In the limit for small impact costs, we explicitly determine the optimal policy and welfare, in a general…
In this note we consider the maximization of the expected terminal wealth for the setup of quadratic transaction costs. First, we provide a very simple probabilistic solution to the problem. Although the problem was largely studied, as far…
This paper presents an optimal allocation problem in a financial market with one risk-free and one risky asset, when the market is driven by a stochastic market price of risk. We solve the problem in continuous time, for an investor with a…
A mean-reverting financial instrument is optimally traded by buying it when it is sufficiently below the estimated `mean level' and selling it when it is above. In the presence of linear transaction costs, a large amount of value is paid…
We consider the problem of the optimal trading strategy in the presence of linear costs, and with a strict cap on the allowed position in the market. Using Bellman's backward recursion method, we show that the optimal strategy is to switch…
We study optimal investment with multiple assets in the presence of small proportional transaction costs. Rather than computing an asymptotically optimal no-trade region, we optimize over suitable trading frequencies. We derive explicit…
We study the range of prices at which a rational agent should contemplate transacting a financial contract outside a given securities market. Trading is subject to nonproportional transaction costs and portfolio constraints and full…
We consider the problem of representing claims for coherent risk measures. For this purpose we introduce the concept of (weak and strong) time-consistency with respect to a portfolio of assets, generalizing the one defined by Delbaen. In a…
This paper studies the equilibrium price of an asset that is traded in continuous time between N agents who have heterogeneous beliefs about the state process underlying the asset's payoff. We propose a tractable model where agents maximize…