Optimal investment policy for pension funds with transaction costs
In this article, we investigate a CRRA investor as a representative of pension plan participants, who has a finite investment horizon and is subject to the proportional transaction costs. He attempts to maximize his utility by trading between stock and money market account. A set of ordinary dierential equations are derived first for analytical solution. We then alternatively propose the binomial tree method in order to numerially solve the dynamic maximizationproblem. Result shows that optimal investment policy is horizon-dependent: the no-transaction region slightly broadens over time and only in the very last moment the investor dramatically reduces transaction. When allowing for intermediate consumption, the investor nds it optimal to keep a larger fraction of wealth in the money market account and reduce trading frequency. In particular, any shock in transaction cost rate, risk, risk premium, relative riskaversion coefficient and time discounting parameter affects shorter-horizon investor more distinctly for both cases.