Utility maximisation in a factor model with constant and proportional transaction costs

Abstract

We study the problem of maximising expected utility of terminal wealth under constant and proportional transaction costs in a multidimensional market with prices driven by a factor process. We show that the value function is the unique viscosity solution of the associated quasi-variational inequalities and construct optimal strategies. While the value function turns out to be truly discontinuous, we are able to establish a comparison principle for discontinuous viscosity solutions which is strong enough to argue that the value function is unique, globally upper semicontinuous, and continuous if restricted to either borrowing or non-borrowing portfolios.