Hereditary Portfolio Optimization with Taxes and Fixed Plus
Proportional Transaction Costs—Part I

Chang, Mou-Hsiung

doi:https://doi.org/10.1155/2007/82753

International Journal of Stochastic Analysis

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Research Article | Open Access

Volume 2007 | Article ID 082753 | https://doi.org/10.1155/2007/82753

Hereditary Portfolio Optimization with Taxes and Fixed Plus Proportional Transaction Costs—Part I

Mou-Hsiung Chang¹

Received23 Jun 2006

Revised26 Oct 2006

Accepted27 Oct 2006

Published08 Jan 2007

Abstract

This is the first of the two companion papers which treat an infinite time horizon hereditary portfolio optimization problem in a market that consists of one savings account and one stock account. Within the solvency region, the investor is allowed to consume from the savings account and can make transactions between the two assets subject to paying capital gain taxes as well as a fixed plus proportional transaction cost. The investor is to seek an optimal consumption-trading strategy in order to maximize the expected utility from the total discounted consumption. The portfolio optimization problem is formulated as an infinite dimensional stochastic classical-impulse control problem. The quasi-variational HJB inequality (QVHJBI) for the value function is derived in this paper. The second paper contains the verification theorem for the optimal strategy. It is also shown there that the value function is a viscosity solution of the QVHJBI.

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Copyright

Copyright © 2007 Mou-Hsiung Chang. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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