DMCA
Dynamic Portfolio Choice with Frictions∗ (2014)
| Citations: | 4 - 0 self |
BibTeX
@MISC{Pedersen14dynamicportfolio,
author = {Lasse Heje Pedersen and Andrea Frazzini and Esben Hedegaard and Brian Hurst and David L and Hong Liu (discussant and Ananth Madhavan (discussant and Stavros Panageas and Andrei Shleifer and Humbert Suarez},
title = {Dynamic Portfolio Choice with Frictions∗},
year = {2014}
}
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Abstract
We show that the optimal portfolio can be derived explicitly in a large class of models with transitory and persistent transaction costs, multiple signals predicting returns, multiple assets, general correlation structure, time-varying volatility, and general dynamics. Our continuous-time model is shown to be the limit of discrete-time models with endogenous transaction costs due to op-timal dealer behavior. Depending on the dealers ’ inventory dynamics, we show that transitory transaction costs survive, respectively vanish, in the limit, cor-responding to an optimal portfolio with bounded, respectively quadratic, vari-ation. Finally, we provide equilibrium implications and illustrate the model’s broader applicability to economics. ∗We are grateful for helpful comments from Kerry Back, Darrell Duffie, Pierre Collin-Dufresne,
Keyphrases
dynamic portfolio choice optimal portfolio op-timal dealer behavior multiple asset persistent transaction cost time-varying volatility continuous-time model kerry back discrete-time model equilibrium implication pierre collin-dufresne dealer inventory dynamic general correlation structure endogenous transaction cost large class darrell duffie helpful comment general dynamic multiple signal transitory transaction cost
