Hereditary portfolio optimization with taxes and fixed plus proportional transaction costs – part I

Hereditary portfolio optimization with taxes and fixed plus proportional transaction costs – part I

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Article ID: iaor20084533
Country: United States
Volume: 2007
Issue: 82753
Start Page Number: 1
End Page Number: 33
Publication Date: Jan 2007
Journal: Journal of Applied Mathematics and Stochastic Analysis
Authors:
Keywords: cost benefit analysis, stochastic processes
Abstract:

This is the first of the two companion papers which treat an infinite time horizon hereditary portfolio optimization problem in a market that consists of one savings account and one stock account. Within the solvency region, the investor is allowed to consume from the savings account and can make transactions between the two assets subject to paying capital gain taxes as well as a fixed plus proportional transaction cost. The investor is to seek an optimal consumption-trading strategy in order to maximize the expected utility from the total discounted consumption. The portfolio optimization problem is formulated as an infinite dimensional stochastic classical-impulse control problem. The quasi-variational HJB inequality (QVHJBI) for the value function is derived in this paper. The second paper contains the verification theorem for the optimal strategy. It is also shown there that the value function is a viscosity solution of the QVHJBI.

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