A model for a large investor trading at market indifference prices. I: Single-period case

Peter Bank () and Dmitry Kramkov ()

Finance and Stochastics, 2015, vol. 19, issue 2, 449-472

Abstract: We develop a single-period model for a large economic agent who trades with market makers at their utility indifference prices. We compute the sensitivities of these market indifference prices with respect to the size of the investor’s order. It turns out that the price impact of an order is determined both by the market makers’ joint risk tolerance and by the variation of individual risk tolerances. On a technical level, a key role in our analysis is played by a pair of conjugate saddle functions associated with the description of Pareto optimal allocations in terms of the aggregate utility function. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Aggregate utility function; Bertrand competition; Demand pressure; Equilibrium; Large investor; Liquidity; Pareto allocation; Price impact; Risk tolerance; Utility indifference prices; 52A41; 60G60; 91G10; 91G20; G11; G12; G13; C61 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (11)

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DOI: 10.1007/s00780-015-0258-y

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