Abstract

We propose a general approximation method for the determination of optimal trading strategies in markets with proportional transaction costs, with a polynomial approximation of the residual value function. The method is exemplified by several problems, from optimally tracking benchmarks and hedging the log contract to maximizing utility from terminal wealth. Strategies are also approximated by practically executable, discrete trades. We identify the necessary trade-off between the trading frequency and trade size to ensure satisfactory agreement with the theoretically optimal, continuous strategies of infinite activity.

Original languageEnglish
Article number64
JournalRisks
Volume12
Issue number4
DOIs
Publication statusPublished - Apr 2024

Keywords

  • asymptotics
  • portfolio choice
  • reflected diffusions
  • shadow prices
  • transaction costs

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