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Portfolio Selection with Stochastic Cash Demand

Published online by Cambridge University Press:  19 October 2009

Andrew H. Chen
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Extract

We have formulated the mean-variance models of portfolio selection with stochastic cash demand. The results of the general model have indicated that the characteristic of the investor's stochastic cash demand, the liquidity risks of assets (measured by the covariance between an asset's return and the cash demand), and the structure of transfer costs also play important roles in the determination of the investor's optimal portfolio. We have also shown that the model of portfolio selection with stochastic cash demand can be greatly simplified if the assumption of symmetric transfer costs is invoked. Furthermore, it has been shown that the simplified model can be reformulated and solved by the LP techniques. Thus, LP formulation of portfolio selection with stochastic cash demand should have practical usefulness.

Finally, along the line of works by Chen, Jen and Zionts [3, 4], Pogue [14, 15] and Stone and Reback [20], one can extend the analysis in this paper to the problem of dynamic portfolio management with stochastic cash demand and transfer costs.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 12 , Issue 2 , June 1977 , pp. 197 - 213
Copyright
Copyright © School of Business Administration, University of Washington 1977

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References

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