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General market
Derivation
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
Motivation
General market
Derivation
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
g (XTs,x,u )
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
(1)
u(t,
y ) = u(t,
y ) t (s + h, T ].
(2)
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
s,x,u
v (s + h, Xs+h
) v (s, x)
0
h0
h
f (s, x, u) + E lim
Motivation
General market
Derivation
By Ito formula:
1
dv (t, X ) =vt dt + vx dX + vxx d hX i
2
1
=vt dt + vx (dt + dW ) + vxx 2 dt,
2
Z s+h
s,x,u
v (s + h, Xs+h
) =v (s, x) +
vt (t, Xtx,s,u )dt
s
Z s+h
+
vx (t, Xtx,s,u )(t, Xtx,s,u , ut )dt
s
Z s+h
+
vx (t, Xtx,s,u )(t, Xtx,s,u , ut )dWt
s
Z
1 s+h
vxx (t, Xtx,s,u ) 2 (t, Xtx,s,u , ut )dt.
+
2 s
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
Motivation
General market
Derivation
v (t, x) =
exp
(T
t)
=
1p
2 2 p
p 2
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
Motivation
General market
Derivation
Motivation
General market
Derivation
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
= p
2 , the wedge is of the following form:
( xt , t + xt )
where
xt =
Petr Zahradnk
Optimal portfolio under proportional transaction costs
3 4
2p
1/3
.
Motivation
General market
Derivation
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
Intuition:
assume log Xn
assume
e (log Xn
k
Pn
n k)
a martingale
a martingale
Motivation
General market
Derivation
General Result:
( xt , t + xt )
1
3 4
d[]t 3
2 d[, F ]t
xt =
( + 2
+
)
2p
d[F ]t
d[F ]t
In other words, if we make a (reality driven) assumption
dt = dt + dWt + 1t dWt1 + 2t dWt2 :
1
3
3
K () , where:
xt =
2p
2
2
2
t 2 + t + 1 + 2
K () =
.
t2
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
(t 2 )
2
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
Motivation
General market
Derivation
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
Dimensions reduction
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
Motivation
General market
Derivation
Motivation
General market
Derivation
(z ) + O( 2/3 ).
zb , zs = z
2p
Petr Zahradnk
Optimal portfolio under proportional transaction costs
Motivation
General market
Derivation
Petr Zahradnk
Optimal portfolio under proportional transaction costs