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Multiple Risky Assets, Transaction Costs and Return Predictability: Implications for Portfolio Choice

Authors: Lynch, Anthony W.
Tan, Sinan
Issue Date: 17-Dec-2002
Series/Report no.: FIN-02-063
Abstract: Our paper contributes to the dynamic portfolio choice and transaction cost literatures by considering a multiperiod CRRA individual who faces transaction costs and who has access to multiple risky assets, all with predictable returns. We numerically solve the individual’s multiperiod problem in the presence of transaction costs and predictability. In particular, we characterize the investor’s optimal portfolio choice with proportional and fixed transaction costs, and with return predictability similar to that observed for the U.S. stock market. We also perform some comparative statics to better understand the nature of the no-trade region with more than one risky asset. Throughout our focus is on the case with two risky assets. We also perform some utility comparisons. The calibration exercise reveals some interesting results about the relative attractiveness of the three equity portfolios calibrated.
Appears in Collections:Finance Working Papers

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