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Discrete-time risk sensitive portfolio optimization with proportional transaction costs

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  • Marcin Pitera
  • {L}ukasz 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 & {L}ukasz Stettner, 2022. "Discrete-time risk sensitive portfolio optimization with proportional transaction costs," Papers 2201.02828, arXiv.org.
    • Handle: RePEc:arx:papers:2201.02828
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    References listed on IDEAS

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