Department of Systems Engineering and Engineering Management,

                    The Chinese University of Hong Kong


Finite Horizon Portfolio Selection with Transaction Costs

Dr DAI Min
Department of Math
and Center of Financial Engineering

Date : May 22, 2006 (Monday)

Time : 4:30 p.m. - 5:30 p.m.

Venue : Room 513, William M.W. Mong Engineering Building

(Engineering Building Complex Phase 2), CUHK

Merton (1971) initiated the study of financial markets via continuous-time
stochastic models. In the absence of transaction costs, he showed that the
optimal fraction of wealth invested in the risky asset is constant. The
introduction of proportional transaction costs to Merton's model was first
accomplished by Magil and Constantinides (1976) who provided a fundamental
insight that the no-transaction region is a wedge. But, their argument is
heuristic. Using a rigorous mathematical analysis, Davis and Norman (1990)
showed that for the infinite horizon problem, the optimal purchasing and
selling policies are determined by the solution of a free boundary problem. In
terms of the notion of viscosity solutions to Hamilton-Jacobi-Bellman (HJB)
equations, Shreve and Soner (1994) examined the optimal policy for the
infinite horizon problem.

In this talk, we are concerned with the finite horizon portfolio selection
with transaction costs. Relying on a partial differential equation approach,
we entirely characterize the properties of the optimal strategy. Our method
allows us to devise efficient numerical algorithms. Numerical results are
presented to demonstrate the efficiency of the algorithms. This is a joint
work with Fahuai Yi.

Dr DAI Min is an assistant professor at Dept of Math, National University of
Singapore (NUS). He got his Ph.D. in mathematics from Fudan University in 2000
and joined NUS in 2004. His interest of research is mathematical finance. He
has been working on the free boundary problems arising from option pricing and
portfolio selection.


Note : Cookies and drinks will be available at 4:15 pm.



                       ***** ALL ARE WELCOME *****

Host : Prof. Xunyu Zhou
Tel : 2609 8238
Email : xyzhou@se.cuhk.edu.hk

For more information please

refer to http://www.se.cuhk.edu.hk/~seg5810/