Please use this identifier to cite or link to this item:
|Title:||Finite Horizon Portfolio Selection|
|Citation:||Economics and Finance Working papers, Brunel University, 01-05|
|Abstract:||We study the problem of maximising expected utility of terminal wealth over a nite horizon, with one risky and one riskless asset available, and with trades in the risky asset subject to proportional transaction costs. In a discrete time setting, using a utility function with hyperbolic risk aversion, we prove that the optimal trading strategy is characterised by a function of time (t), which represents the ratio of wealth held in the risky asset to that held in the riskless asset. There is a time varying no transaction region with boundaries b(t) < s(t), such that the portfo- lio is only rebalanced when (t) is outside this region. The results are consistent with similar studies of the in nite horizon problem with in- termediate consumption, where the no transaction region has a similar, but time independent, characterisation. We solve the problem numerically and compute the boundaries of the no transaction region for typical model parameters. We show how the results can be used to implement option pricing models with transaction costs based on utility maximisation over a nite horizon|
|Appears in Collections:||Dept of Economics and Finance Research Papers|
Items in BURA are protected by copyright, with all rights reserved, unless otherwise indicated.