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Annual Review of Financial Economics

Volume 9, 2017

A Primer on Portfolio Choice with Small Transaction Costs

Abstract

This review is an introduction to asymptotic methods for portfolio choice problems with small transaction costs. We outline how to derive the corresponding dynamic programming equations and how to simplify them in the small-cost limit. This allows one to obtain explicit solutions in a wide range of settings, which we illustrate for a model with mean-reverting expected returns and proportional transaction costs. For more complex models, we present a policy iteration scheme that allows one to numerically compute the solution.

Keyword(s): asymptotic expansions, optimal investment and consumption, transaction costs, viscosity solutions
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2017-11-01
2025-04-29
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/content/journals/10.1146/annurev-financial-110716-032445
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A Primer on Portfolio Choice with Small Transaction Costs
Annual Review of Financial Economics 9, 301 (2017); https://doi.org/10.1146/annurev-financial-110716-032445
/content/journals/10.1146/annurev-financial-110716-032445
/content/journals/10.1146/annurev-financial-110716-032445
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