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Discrete‐time risk sensitive portfolio optimization with proportional transaction costs

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  • Marcin Pitera
  • Łukasz Stettner

Abstract

In this paper we consider a discrete‐time risk sensitive portfolio optimization over a long time horizon with proportional transaction costs. We show that within the log‐return i.i.d. framework the solution to a suitable Bellman equation exists under minimal assumptions and can be used to characterize the optimal strategies for both risk‐averse and risk‐seeking cases. Moreover, using numerical examples, we show how a Bellman equation analysis can be used to construct or refine optimal trading strategies in the presence of transaction costs.

Suggested Citation

  • Marcin Pitera & Łukasz Stettner, 2023. "Discrete‐time risk sensitive portfolio optimization with proportional transaction costs," Mathematical Finance, Wiley Blackwell, vol. 33(4), pages 1287-1313, October.
    • Handle: RePEc:bla:mathfi:v:33:y:2023:i:4:p:1287-1313
    DOI: 10.1111/mafi.12406
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