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arXiv · 2304.07672

Optimal Investment and Consumption Strategies with General Cost Structure under CRRA Utility

Yingting Miao·Qiang Zhang
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Abstract

Transaction costs play a critical role in portfolio allocation and consumption decisions. We study a finite-horizon consumption--investment problem with CRRA utility under a general class of transaction cost functions. Based on dynamic programming and a singular perturbation expansion for a small cost-to-wealth ratio, we derive leading-order asymptotic formulas for the no-trade region, the four trading boundaries, the value function correction, and the optimal consumption rate. We further show how fixed, proportional, fixed-plus-proportional, and nonlinear transaction costs arise as special cases of the general framework. The results show that the leading-order no-trade region is governed by the fixed and proportional components, while the framework still accommodates nonlinear cost structures. Complementing the asymptotic analysis, we prove a verification theorem for the exact impulse-control formulation under a strictly positive fixed cost component, and characterize its limiting transitions to singular and continuous control regimes as the fixed cost vanishes.

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Yingting Miao, Qiang Zhang. 2023-04-16. Optimal Investment and Consumption Strategies with General Cost Structure under CRRA Utility. https://arxiv.org/abs/2304.07672

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