PORTFOLIO MODELS WITH STOCHASTIC CASH DEMAND,BORROWING AND FIXED TRANSFER COSTS

Portfolio models of the Markowitz-Tobin type implicitly assume that the investor does not have to liquidate any part of his portfolio to meet some exogenous cash demand. Since liquidity needs can be an important factor in portfolio management, Chen, Jen, and Zionts 3] in a recent paper developed a model assuming stochastic demand for cash and the possibility of meeting the cash demand by liquidating one or more assets. However, borrowing is an important alternative to liquidating assets. This paper considers that possibility. Unlike Chen, Jen, and Zionts, this paper also considers the more difficult question of liquidation costs being partly fixed and partly variable. In order to make the consideration of borrowing and fixed transfer costs mathematically tractable, the problem is first cast in a framework different from that of 3].