Optimal Index Tracking Under Transaction Costs and Impulse Control

1998

We apply impulse control techniques to a cash management problem within a mean-variance framework. We consider the strategy of an investor who is trying to minimise both fixed and proportional transaction costs, whilst minimising the tracking error with respect to an index portfolio. The cash weight is constantly fluctuating due to the stochastic inflow and outflow of dividends and liabilities. We show the existence of an optimal strategy and compute it numerically.