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Trading with Small Price Impact

Author

Listed:
  • Ludovic MOREAU

    (ETH Zurich)

  • Johannes MUHLE-KARBE

    (ETH Zurich and Swiss Finance Institute)

  • Halil Mete SONER

    (ETH Zurich and Swiss Finance Institute)

Abstract

An investor trades a safe and several risky assets with linear price impact to maximize expected utility from terminal wealth. In the limit for small impact costs, we explicitly determine the optimal policy and welfare, in a general Markovian setting allowing for stochastic market, cost, and preference parameters. These results shed light on the general structure of the problem at hand, and also unveil close connections to optimal execution problems and to other market frictions such as proportional and fixed transaction costs.

Suggested Citation

  • Ludovic MOREAU & Johannes MUHLE-KARBE & Halil Mete SONER, 2014. "Trading with Small Price Impact," Swiss Finance Institute Research Paper Series 14-17, Swiss Finance Institute, revised Mar 2015.
    • Handle: RePEc:chf:rpseri:rp1417
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    File URL: http://ssrn.com/abstract=2402245
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    Citations

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    Cited by:

    1. 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.
    2. Ibrahim Ekren & Ren Liu & Johannes Muhle-Karbe, 2015. "Optimal Rebalancing Frequencies for Multidimensional Portfolios," Papers 1510.05097, arXiv.org, revised Sep 2017.
    3. Peter Bank & Mete Soner & Moritz Vo{ss}, 2015. "Hedging with Temporary Price Impact," Papers 1510.03223, arXiv.org, revised Jul 2016.

    More about this item

    Keywords

    price impact; portfolio choice; asymptotics; homogenization;
    All these keywords.

    JEL classification:

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

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