Optimal Investment with Transaction Costs under Cumulative Prospect Theory in Discrete Time

Abstract: We study optimal investment problems under the framework of cumulative prospect theory (CPT). A CPT investor makes investment decisions in a single-period financial market with transaction costs. The objective is to seek the optimal investment strategy that maximizes the prospect value of the investor's final wealth. We obtain the optimal investment strategy explicitly in two examples. An economic analysis is conducted to investigate the impact of the transaction costs and risk aversion on the optimal investment strategy.