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

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Author(s): Mou-Hsiung Chang

Journal: Journal of Applied Mathematics and Stochastic Analysis
ISSN 1048-9533

Volume: 2007;
Date: 2007;
Original page

ABSTRACT
This paper is the continuation of the paper entitled “Hereditary portfolio optimization with taxes and fixed plus proportional transaction costs I” that treats 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 due to the hereditary nature of the stock price dynamics and inventories. This paper contains the verification theorem for the optimal strategy. It also proves that the value function is a viscosity solution of the QVHJBI.
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