Carnegie Mellon University
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Optimal investment and consumption with transaction costs.

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journal contribution
posted on 1990-01-01, 00:00 authored by Steven E. Shreve, H. Mete. Soner, Gan-Lin Xu
Abstract: "An agent can invest in a high-yield bond and a low-yield bond, holding either long or short positions in either asset. Any movement of money between these two assets incurs a transaction cost proportional to the size of the transaction. The low-yield bond is liquid in the sense that wealth invested in this bond can be consumed directly without a transaction cost; wealth invested in the high-yield bond can be consumed only by first moving it into the low-yield bond. The problem of optimal consumption and investment on an infinite planning horizon is solved for a class of utility functions larger than the class of power functions."


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