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Portfolio valuation under liquidity constraints with permanent price impact

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  • Csóka, Péter
  • Hevér, Judit

Abstract

When institutional investors rearrange their portfolios, they should consider both the temporary and the permanent price impacts. After a temporary price impact the order book fully recovers, whereas a permanent price impact changes the equilibrium price, having effects on the resulting portfolio.

Suggested Citation

  • Csóka, Péter & Hevér, Judit, 2018. "Portfolio valuation under liquidity constraints with permanent price impact," Finance Research Letters, Elsevier, vol. 26(C), pages 235-241.
    • Handle: RePEc:eee:finlet:v:26:y:2018:i:c:p:235-241
    DOI: 10.1016/j.frl.2018.02.019
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    References listed on IDEAS

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    1. Csóka, Péter & Herings, P. Jean-Jacques, 2014. "Risk allocation under liquidity constraints," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 1-9.
    2. Kitamura, Yoshihiro, 2016. "The probability of informed trading measured with price impact, price reversal, and volatility," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 42(C), pages 77-90.
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    4. Webb, Robert I. & Ryu, Doojin & Ryu, Doowon & Han, Joongho, 2016. "The price impact of futures trades and their intraday seasonality," Emerging Markets Review, Elsevier, vol. 26(C), pages 80-98.
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    6. Yu Tian & Ron Rood & Cornelis W. Oosterlee, 2013. "Efficient portfolio valuation incorporating liquidity risk," Quantitative Finance, Taylor & Francis Journals, vol. 13(10), pages 1575-1586, October.
    7. Csóka, Péter, 2017. "Fair risk allocation in illiquid markets," Finance Research Letters, Elsevier, vol. 21(C), pages 228-234.
    8. Gur Huberman & Werner Stanzl, 2004. "Price Manipulation and Quasi-Arbitrage," Econometrica, Econometric Society, vol. 72(4), pages 1247-1275, July.
    9. Dömötör, Barbara, 2017. "Optimal hedge ratio in a biased forward market under liquidity constraints," Finance Research Letters, Elsevier, vol. 21(C), pages 259-263.
    10. Alzahrani, Ahmed A. & Gregoriou, Andros & Hudson, Robert, 2012. "Can market frictions really explain the price impact asymmetry of block trades? Evidence from the Saudi Stock Market," Emerging Markets Review, Elsevier, vol. 13(2), pages 202-209.
    11. Robert Almgren, 2003. "Optimal execution with nonlinear impact functions and trading-enhanced risk," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(1), pages 1-18.
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    More about this item

    Keywords

    Portfolio valuation; Liquidity risk; Permanent price impact; SEC Rule 22e-4;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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