Journal of Applied Mathematics and Stochastic Analysis
Volume 2007 (2007), Article ID 40149, 25 pages
Hereditary Portfolio Optimization with Taxes and Fixed Plus Proportional Transaction Costs—Part II
Mathematics Division, US Army Research Office, P.O. Box 12211, Research Triangle Park, 27709-2211, NC, USA
Received 23 June 2006; Revised 26 October 2006; Accepted 27 October 2006
Copyright © 2007 Mou-Hsiung Chang. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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.