PRELIMINARY AND INCOMPLETE

We show that the optimal portfolio can be derived explicitly in a large class of mod-els with transitory and persistent transaction costs, multiple signals predicting returns, multiple assets, general correlation structure, time-varying volatility, and general dy-namics. Our tractable continuous-time model is shown to be the limit of discrete-time models with endogenous transaction costs due to optimal dealer behavior. Depending on the dealers ’ inventory dynamics, we show that transitory transaction costs survive, respectively vanish, in the limit, corresponding to an optimal portfolio with bounded, respectively quadratic, variation. Finally, we provide equilibrium implications and illustrate the model’s broader applicability to economics. ∗We are grateful for helpful comments from Kerry Back, Darrell Duffie, Pierre Collin-Dufresne, Andre