Growth-Optimal Strategies with Quadratic Friction Over Finite-Time Investment Horizons

TL;DR

This paper derives an analytically solvable model for growth-optimal investment strategies in a stock-bond portfolio considering quadratic transaction costs over finite investment horizons.

Contribution

It introduces a new model that characterizes the optimal investment interval accounting for transaction costs and finite time horizons.

Findings

Optimal investment interval depends on transaction costs and time horizon.

The model provides an explicit solution for the growth-optimal strategy.

Investment strategies are robust within the derived interval.

Abstract

We investigate the growth optimal strategy over a finite time horizon for a stock and bond portfolio in an analytically solvable multiplicative Markovian market model. We show that the optimal strategy consists in holding the amount of capital invested in stocks within an interval around an ideal optimal investment. The size of the holding interval is determined by the intensity of the transaction costs and the time horizon.