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Optimal Portfolio Selection Strategies In The Presence Of Transaction Costs

Author

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  • QIANG MENG

    (Department of Mathematics, Iowa State University, Ames, IA 50011, USA)

  • ANANDA WEERASINGHE

    (Department of Mathematics, Iowa State University, Ames, IA 50011, USA)

Abstract

We consider an investor who has available a bank account (risk free asset) and a stock (risky asset). It is assumed that the interest rate for the risk free asset is zero and the stock price is modeled by a diffusion process. The wealth can be transferred between the two assets under a proportional transaction cost. Investor is allowed to obtain loans from the bank and also to short-sell the risky asset when necessary. The optimization problem addressed here is to maximize the probability of reaching a financial goal a before bankruptcy and to obtain an optimal portfolio selection policy. Our optimal policy is a combination of local-time processes and jumps. In the interesting case, it is determined by a non-linear switching curve on the state space. This work is a generalization of Weerasinghe [20], where this switching boundary is a vertical line segment.

Suggested Citation

  • Qiang Meng & Ananda Weerasinghe, 2006. "Optimal Portfolio Selection Strategies In The Presence Of Transaction Costs," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(04), pages 619-641.
    • Handle: RePEc:wsi:ijtafx:v:09:y:2006:i:04:n:s021902490600369x
    DOI: 10.1142/S021902490600369X
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