Trading with Small Price Impact

Ludovic Moreau, Johannes Muhle-Karbe and Halil Mete Soner
Additional contact information
Ludovic Moreau: ETH Zurich
Johannes Muhle-Karbe: ETH Zurich and Swiss Finance Institute
Halil Mete Soner: ETH Zurich and Swiss Finance Institute

No 14-17, Swiss Finance Institute Research Paper Series from 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.

Keywords: price impact; portfolio choice; asymptotics; homogenization (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2014-02, Revised 2015-03
New Economics Papers: this item is included in nep-mst and nep-upt
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1417

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