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Title: Finite Horizon Portfolio Selection with Transaction Costs
Authors: LI PEIFAN
Keywords: portfolio selection, transaction costs, finite horizon, consumption, market closure, liquidity premium
Issue Date: 11-Feb-2010
Citation: LI PEIFAN (2010-02-11). Finite Horizon Portfolio Selection with Transaction Costs. ScholarBank@NUS Repository.
Abstract: This thesis concerns continuous-time portfolios selection for a constant relative risk aversion (CRRA) investor who faces proportional transaction costs and a finite time horizon. Mathematically, it is a singular stochastic control problem whose value function satisfies a parabolic variational inequality with gradient constraints. The problem gives rise to two free boundaries which stand for the optimal buying and selling strategies, respectively. Two factors are considered separately in this thesis: consumption and market closure. In the consumption case, we present an analytical approach to analyze the behaviors of the free boundaries. The regularity of the value function is studied as well. In the market closure case, we find that assuming the well-established time-varying return dynamics can generate a first order effect of transaction costs on liquidity premium, which is much greater than that found by existing literature and comparable to empirical evidence. The impacts of market closure on trading strategies, wealth loss, and trading volume are investigated in details.
Appears in Collections:Ph.D Theses (Open)

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