Palczewski, J, Poulsen, R, Schenk-Hoppé, KR et al. (1 more author) (2015) Dynamic portfolio optimization with transaction costs and state-dependent drift. European Journal of Operational Research, 243 (3). pp. 921-931. ISSN 0377-2217
Abstract
The problem of dynamic portfolio choice with transaction costs is often addressed by constructing a Markov Chain approximation of the continuous time price processes. Using this approximation, we present an efficient numerical method to determine optimal portfolio strategies under time- and state-dependent drift and proportional transaction costs. This scenario arises when investors have behavioral biases or the actual drift is unknown and needs to be estimated. Our numerical method solves dynamic optimal portfolio problems with an exponential utility function for time-horizons of up to 40 years. It is applied to measure the value of information and the loss from transaction costs using the indifference principle.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 2014, Elsevier. This is an author produced version of a paper accepted for publication in European Journal of Operational Research. Uploaded in accordance with the publisher's self-archiving policy. |
Keywords: | Dynamic programming; Markov Chain approximation; Numerical methods; State-dependent drift; Transaction costs |
Dates: |
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Institution: | The University of Leeds |
Academic Units: | The University of Leeds > Faculty of Engineering & Physical Sciences (Leeds) > School of Mathematics (Leeds) > Statistics (Leeds) |
Depositing User: | Symplectic Publications |
Date Deposited: | 24 Feb 2015 12:45 |
Last Modified: | 03 Jan 2017 14:31 |
Published Version: | http://dx.doi.org/10.1016/j.ejor.2014.12.040 |
Status: | Published |
Publisher: | Elsevier |
Refereed: | Yes |
Identification Number: | 10.1016/j.ejor.2014.12.040 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:83104 |