Optimal Trading Strategies of a Fund Manager with Transaction Costs : An Exact Solution

This paper considers an intertemporal portfolio choice model with two assets, one risky and one riskless. Transactions costs are incurred when an agent either purchases or sells shares of risky assets. The agent is assumed to maximize the limiting long run expected growth rate of his or her wealth. It is shown that the agent's optimal trading strategy is a barrier policy with two constant control limits: a policy that keeps the ratio between wealth invested in the risky asset and wealth invested in the riskless asset within a constant interval. The optimal control limits can be determined from a single algebraic equation. Numerical procedures for estimating these controls limits are presented