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Portfolio Choice with Small Temporary and Transient Price Impact

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  • Ibrahim Ekren
  • Johannes Muhle-Karbe

Abstract

We study portfolio selection in a model with both temporary and transient price impact introduced by Garleanu and Pedersen (2016). In the large-liquidity limit where both frictions are small, we derive explicit formulas for the asymptotically optimal trading rate and the corresponding minimal leading-order performance loss. We find that the losses are governed by the volatility of the frictionless target strategy, like in models with only temporary price impact. In contrast, the corresponding optimal portfolio not only tracks the frictionless optimizer, but also exploits the displacement of the market price from its unaffected level.

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  • Ibrahim Ekren & Johannes Muhle-Karbe, 2017. "Portfolio Choice with Small Temporary and Transient Price Impact," Papers 1705.00672, arXiv.org, revised Apr 2020.
    • Handle: RePEc:arx:papers:1705.00672
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    Cited by:

    1. Ibrahim Ekren & Sergey Nadtochiy, 2019. "Utility-based pricing and hedging of contingent claims in Almgren-Chriss model with temporary price impact," Papers 1910.01778, arXiv.org, revised Jun 2020.
    2. Erhan Bayraktar & Thomas Cayé & Ibrahim Ekren, 2021. "Asymptotics for small nonlinear price impact: A PDE approach to the multidimensional case," Mathematical Finance, Wiley Blackwell, vol. 31(1), pages 36-108, January.
    3. Eyal Neuman & Moritz Vo{ss}, 2020. "Optimal Signal-Adaptive Trading with Temporary and Transient Price Impact," Papers 2002.09549, arXiv.org, revised Jan 2022.
    4. Peter Bank & Moritz Vo{ss}, 2018. "Optimal investment with transient price impact," Papers 1804.07392, arXiv.org.

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