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Growth-Optimal Strategies With Quadratic Friction Over Finite-Time Investment Horizons

Author

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  • ERIK AURELL

    (Swedish Institute of Computer Science, SICS Box 1263 SE-16429, Kista, Sweden;
    Department of Numerical Analysis and Computer Science, KTH-Royal Institute of Technology, SE-100 44 Stockholm, Sweden)

  • PAOLO MURATORE-GINANNESCHI

    (Departments of Mathematics, P.O. Box 4 FIN-00014, University of Helsinki, Finland)

Abstract

We investigate the growth optimal strategy over a finite time horizon for a stock and bond portfolio in an analytically solvable multiplicative Markovian market model. We show that the optimal strategy consists in holding the amount of capital invested in stocks within an interval around an ideal optimal investment. The size of the holding interval is determined by the intensity of the transaction costs and the time horizon.

Suggested Citation

  • Erik Aurell & Paolo Muratore-Ginanneschi, 2004. "Growth-Optimal Strategies With Quadratic Friction Over Finite-Time Investment Horizons," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 7(05), pages 645-657.
    • Handle: RePEc:wsi:ijtafx:v:07:y:2004:i:05:n:s0219024904002578
    DOI: 10.1142/S0219024904002578
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    References listed on IDEAS

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    1. J. Doyne Farmer, 2002. "Market force, ecology and evolution," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 11(5), pages 895-953, November.
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