A0325
Title: Optimal investment with return predictability and trading frictions: An asymptotic approach
Authors: Chi Chung Siu - The Hang Seng University of Hong Kong (Hong Kong) [presenting]
Wing Yan Tsui - The Hang Seng University of Hong Kong (Hong Kong)
Guiyuan Ma - School of Economics and Finance Xian Jiaotong University (China)
Abstract: An optimal investment problem of a maximising utility agent with return predictability and trading frictions is studied. Adopting a logarithmic return assumption, the asymptotic expansion around small liquidity costs provides the closed-form expressions for the first-order approximation of the value function and the associated almost-optimal trading strategy. The almost optimal trading strategy indicates that the agent should trade toward the optimal frictionless portfolio instead of directly adopting it. The approximated value function effectively captures the utility loss derived from the agents' inability to adopt the optimal frictionless portfolio over time directly. Finally, the numerical analysis indicates that the agent's utility loss is sensitive to the specifications of the return-predicting factors and that the agent's trading behaviours under the logarithmic return and arithmetic return assumptions can differ remarkably over a medium to a long investment horizon.
