Title: Optimal portfolio selection with transaction costs in compound binomial model

Authors: Fang Jin; Hui Ou

Addresses: College of Science, Hunan City University, 413000, Yiyang, China ' College of Mathematics and Statistics, Hunan Normal University, 410081, Changsha, China

Abstract: Investors consider investing in an investment market including a risk-free asset plus a risky asset to get maximum profit. At the same time, the insurer has a proportional transaction cost every time they invest in risky assets in an actual situation. In this paper a compound binomial model with investment costs as well as considering proportion investment costs was studied. We want to get the optimal investment strategy to maximise the expected utility of terminal wealth in the financial market. In order to solve this problem, we use the analytical method and construct the no-transaction region at time t to help us solve the problem. Finally, the expressions of the optimal investment strategy and the value function are derived, respectively. In addition, on the basis of this paper, we can consider introducing other influencing factors, such as: random time exit, Markovian environmental impact and so on.

Keywords: optimal portfolio; transaction costs; compound binomial model.

DOI: 10.1504/IJADS.2022.120300

International Journal of Applied Decision Sciences, 2022 Vol.15 No.1, pp.1 - 14

Received: 02 Dec 2020
Accepted: 19 Mar 2021

Published online: 13 Jan 2022 *

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