Optimal investment in illiquid market with search frictions and transaction costs

Abstract

We consider an optimal investment problem to maximize expected utility of the terminal wealth, in an illiquid market with search frictions and transaction costs. In the market model, an investor's attempt of transaction is successful only at arrival times of a Poisson process, and the investor pays proportional transaction costs when the transaction is successful. We characterize the no-trade region describing the optimal trading strategy. We provide asymptotic expansions of the boundaries of the no-trade region and the value function, for small transaction costs. The asymptotic analysis implies that the effects of the transaction costs are more pronounced.