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Optimal Investment and Consumption With Two Bonds and Transaction Costs1

Author

Listed:
  • S. E. Shreve
  • H. M. Soner
  • G.‐L. Xu

Abstract

An agent can invest in a high‐yield bond and a low‐yield bond, holding either long or short positions in either asset. Any movement of money between these two assets incurs a transaction cost proportional to the size of the transaction. the low‐yield bond is liquid in the sense that wealth invested in this bond can be consumed directly without a transaction cost; wealth invested in the high‐yield bond can be consumed only by first moving it into the low‐yield bond. the problem of optimal consumption and investment on an infinite planning horizon is solved for a class of utility functions larger than the class of power functions.

Suggested Citation

  • S. E. Shreve & H. M. Soner & G.‐L. Xu, 1991. "Optimal Investment and Consumption With Two Bonds and Transaction Costs1," Mathematical Finance, Wiley Blackwell, vol. 1(3), pages 53-84, July.
    • Handle: RePEc:bla:mathfi:v:1:y:1991:i:3:p:53-84
    DOI: 10.1111/j.1467-9965.1991.tb00016.x
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    Cited by:

    1. Akian, Marianne & Menaldi, Jose Luis & Sulem, Agnès, 1995. "Multi-asset portfolio selection problem with transaction costs," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 38(1), pages 163-172.
    2. repec:dau:papers:123456789/5374 is not listed on IDEAS
    3. Kogan, Leonid, 2001. "An equilibrium model of irreversible investment," Journal of Financial Economics, Elsevier, vol. 62(2), pages 201-245, November.
    4. Delgado, Francisco & Dumas, Bernard & Puopolo, Giovanni W., 2015. "Hysteresis bands on returns, holding period and transaction costs," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 86-100.

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