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The dual optimizer for the growth-optimal portfolio under transaction costs

Research paper by S. Gerhold, J. Muhle-Karbe, W. Schachermayer

Indexed on: 24 Nov '11Published on: 24 Nov '11Published in: Finance and Stochastics



Abstract

We consider the maximization of the long-term growth rate in the Black–Scholes model under proportional transaction costs as in Taksar et al. (Math. Oper. Res. 13:277–294, 1988). Similarly as in Kallsen and Muhle-Karbe (Ann. Appl. Probab. 20:1341–1358, 2010) for optimal consumption over an infinite horizon, we tackle this problem by determining a shadow price, which is the solution of the dual problem. It can be calculated explicitly up to determining the root of a deterministic function. This in turn allows one to explicitly compute fractional Taylor expansions, both for the no-trade region of the optimal strategy and for the optimal growth rate.