Saved in:
| Main Authors: | , , , |
|---|---|
| Format: | Preprint |
| Published: |
2025
|
| Subjects: | |
| Online Access: | https://arxiv.org/abs/2510.21156 |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| _version_ | 1866908655782199296 |
|---|---|
| author | Yan, Dong Zhou, Ke Wang, Zirun He, Xin-Jiang |
| author_facet | Yan, Dong Zhou, Ke Wang, Zirun He, Xin-Jiang |
| contents | In this paper, we investigate a portfolio selection problem with transaction costs under a two-factor stochastic volatility structure, where volatility follows a mean-reverting process with a stochastic mean-reversion level. The model incorporates both proportional exogenous transaction costs and endogenous costs modeled by a stochastic liquidity risk process. Using an option-implied approach, we extract an S-shaped utility function that reflects investor behavior and apply its concave envelope transformation to handle the non-concavity. The resulting problem reduces to solving a five-dimensional nonlinear Hamilton-Jacobi-Bellman equation. We employ a deep learning-based policy iteration scheme to numerically compute the value function and the optimal policy. Numerical experiments are conducted to analyze how both types of transaction costs and stochastic volatility affect optimal investment decisions. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2510_21156 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Portfolio selection with exogenous and endogenous transaction costs under a two-factor stochastic volatility model Yan, Dong Zhou, Ke Wang, Zirun He, Xin-Jiang Mathematical Finance In this paper, we investigate a portfolio selection problem with transaction costs under a two-factor stochastic volatility structure, where volatility follows a mean-reverting process with a stochastic mean-reversion level. The model incorporates both proportional exogenous transaction costs and endogenous costs modeled by a stochastic liquidity risk process. Using an option-implied approach, we extract an S-shaped utility function that reflects investor behavior and apply its concave envelope transformation to handle the non-concavity. The resulting problem reduces to solving a five-dimensional nonlinear Hamilton-Jacobi-Bellman equation. We employ a deep learning-based policy iteration scheme to numerically compute the value function and the optimal policy. Numerical experiments are conducted to analyze how both types of transaction costs and stochastic volatility affect optimal investment decisions. |
| title | Portfolio selection with exogenous and endogenous transaction costs under a two-factor stochastic volatility model |
| topic | Mathematical Finance |
| url | https://arxiv.org/abs/2510.21156 |