Optimal consumption and investment decisions in the presence of transaction costs

Abstract

This dissertation develops the mathematics and economic theory of optimal consumption and portfolio selection problems with market friction, trans-action costs, which is continuously attended by financial theorists and empiricists. We include three themes: First, we give economic interpretations of an optimal consumption and portfolio selection problem with transaction costs when the investor has a finite investment horizon, and suggest a numerical algorithm for the solution of this problem and prove its convergence. Second, we suggest a proper definition of the price of illiquid asset, when the market faces transaction costs. Third, we calculate liquidity premia under the finite horizon model which is introduced by Liu and Loewenstein (2002), and obtain that transaction costs can give a first-order effect for an investor having a short investment horizon.