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Dynamic portfolio choice with frictions
- Source :
- Journal of Economic Theory. :487-516
- Publisher :
- The Author(s). Published by Elsevier Inc.
-
Abstract
- We show how portfolio choice can be modeled in continuous time with transitory and persistent transaction costs, multiple assets, multiple signals predicting returns, and general signal dynamics. The objective function is derived from the limit of discrete-time models with endogenous transaction costs due to optimal dealer behavior. We solve the model explicitly and the intuitive solution is also the limit of the solutions of the corresponding discrete-time models. We show how the optimal high-frequency trading strategy depends on the nature of the trading costs, which in turn depend on dealers' inventory dynamics. Finally, we provide equilibrium implications and illustrate the model's broader applicability to micro- and macro-economics, monetary policy, and political economy.
- Subjects :
- Transaction cost
Economics and Econometrics
050208 finance
Transaction costs
Equilibrium
05 social sciences
Monetary policy
SIGNAL (programming language)
Predictability
01 natural sciences
Microeconomics
010104 statistics & probability
Dynamic trading
Frictions
Continuous time
8. Economic growth
0502 economics and business
Economics
Portfolio
Trading strategy
Limit (mathematics)
0101 mathematics
Subjects
Details
- Language :
- English
- ISSN :
- 00220531
- Database :
- OpenAIRE
- Journal :
- Journal of Economic Theory
- Accession number :
- edsair.doi.dedup.....c932c4245e5fd7b615aa7c635a941751
- Full Text :
- https://doi.org/10.1016/j.jet.2016.06.001