Asymptotic Methods for Transaction Costs

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...

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Bibliographic Details
Published inRisks (Basel) Vol. 12; no. 4; p. 64
Main Author Mayerhofer, Eberhard
Format Journal Article
LanguageEnglish
Published Basel MDPI AG 01.04.2024
Subjects
Analysis
Approximation
asymptotics
Costs
Hedging (Finance)
International economic relations
Investors
Methods
Optimization
portfolio choice
reflected diffusions
Risk aversion
Shadow prices
Solvency
transaction costs
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Summary: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.
ISSN:2227-9091
2227-9091
DOI:10.3390/risks12040064