Continuous-Time Markowitz's Model with Transaction Costs

Continuous-Time Markowitz's Model with Transaction Costs

A continuous-time Markowitz’s mean-variance portfolio selection problem is studied in a market with one stock, one bond, and proportional transaction costs. This is a singular stochastic control problem, inherently with a finite time horizon. Via a series of transformations, the problem is turned into a so-called double obstacle problem, a well studied problem in physics and partial differentia...

Penalty Methods for Continuous-Time Portfolio Selection with Proportional Transaction Costs

This paper is concerned with numerical solutions to a singular stochastic control problem arising from the continuous-time portfolio selection with proportional transaction costs. The associated value function is governed by a variational inequality with gradient constraints. We propose a penalty method to deal with the gradient constraints and employ a finite difference discretization. Converg...

Futures trading with transaction costs

A model for optimal consumption and investment is posed whose solution is provided by the classical Merton analysis when there is zero transaction cost. A probabilistic argument is developed to identify the loss in value when a proportional transaction cost is introduced. There are two sources of this loss. The first is a loss due to “displacement” that arises because one cannot maintain the op...

Convex Duality with Transaction Costs

Copyright: © 2016 INFORMS Abstract. Convex duality for two different super-replication problems in a continuous time financial market with proportional transaction cost is proved. In this market, static hedging in a finite number of options, in addition to usual dynamic hedging with the underlying stock, are allowed. The first one of the problems considered is the modelindependent hedging that ...

Option Hedging with Transaction Costs