Homogenization and asymptotics for small transaction costs

Details Homogenization and asymptotics for small transaction costs Homogenization and asymptotics for small transaction costs

2012-02-28

arxiv.org/abs/1202.6131v2

Mathematics

Optimization and Control

29 pages

Scientific paper

We consider the classical Merton problem of lifetime consumption-portfolio optimization problem with small proportional transaction costs. The first order term in the asymptotic expansion is explicitly calculated through a singular ergodic control problem which can be solved in closed form in the one-dimensional case. Unlike the existing literature, we consider a general utility function and general dynamics for the underlying assets. Our arguments are based on ideas from the homogenization theory and use the convergence tools from the theory of viscosity solutions. The multidimensional case is studied in our accompanying paper using the same approach.

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