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Portfolio optimization under transaction costs in the CRR model

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  • Jörn Sass

Abstract

In the CRR model we introduce a transaction cost structure which covers piecewise proportional, fixed and constant costs. For a general utility function we formulate the problem of maximizing the expected utility of terminal wealth as a Markov control problem. An existence result is given and optimal strategies can be described by solutions of the dynamic programming equation. For logarithmic utility we provide detailed solutions in the one-period case and provide examples for the multi-dimensional case and for complex cost structures. For a combination of fixed and proportional costs a fast multi-period algorithm is introduced. Copyright Springer-Verlag 2005

Suggested Citation

  • Jörn Sass, 2005. "Portfolio optimization under transaction costs in the CRR model," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 61(2), pages 239-259, June.
    • Handle: RePEc:spr:mathme:v:61:y:2005:i:2:p:239-259
    DOI: 10.1007/s00186-005-0415-8
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    Citations

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    Cited by:

    1. Colin Atkinson & Emmeline Storey, 2010. "Building an Optimal Portfolio in Discrete Time in the Presence of Transaction Costs," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(4), pages 323-357.
    2. Christian Bayer & Bezirgen Veliyev, 2014. "Utility Maximization In A Binomial Model With Transaction Costs: A Duality Approach Based On The Shadow Price Process," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(04), pages 1-27.
    3. Jörn Sass & Manfred Schäl, 2014. "Numeraire portfolios and utility-based price systems under proportional transaction costs," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 37(2), pages 195-234, October.
    4. Romain Blanchard & Laurence Carassus & Miklós Rásonyi, 2018. "No-arbitrage and optimal investment with possibly non-concave utilities: a measure theoretical approach," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 88(2), pages 241-281, October.
    5. Alet Roux, 2007. "The fundamental theorem of asset pricing under proportional transaction costs," Papers 0710.2758, arXiv.org.
    6. Romain Blanchard & Laurence Carassus & Miklos Rasonyi, 2018. "Optimal investment with possibly non-concave utilities and no-arbitrage: a measure theoretical approach," Post-Print hal-01883419, HAL.

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