Abstract
We study optimal portfolio decisions for a retail investor that faces a strictly positive transaction cost in a classical Black-Scholes market. We provide a construction of optimal trading strategies and characterize the value function as the unique viscosity solution of the associated quasi-variational inequalities. Moreover, we numerically investigate the optimal trading regions for a variety of real-world cost structures faced by retail investors. We find that the cost structure has a strong effect on the qualitative shape of the no-trading region and optimal strategies.
| Original language | English |
|---|---|
| Pages (from-to) | 555-594 |
| Number of pages | 40 |
| Journal | Mathematical Finance |
| Volume | 32 |
| Issue number | 2 |
| DOIs | |
| State | Published - Apr 2022 |
| Externally published | Yes |
Keywords
- portfolio optimization
- retail investor
- transaction costs