Portfolio valuation under liquidity constraints with permanent price impact

Péter Csóka and Judit Hever ()
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Judit Hever: Department of Finance, Corvinus Business School, Corvinus University of Budapest and Pallas Athéné Domus Educationis Scholarship

No 1736, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

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. In this paper, for a given period, we introduce an optimization problem for valuing illiquid portfolios with permanent price impacts. We show how to find the optimal trade to satisfy certain portfolio constraints. As a policy implication, we note that introducing permanent price impacts in internal or external regulation can substantially change liquidity risk or capital requirements.

Keywords: Portfolio Valuation; Liquidity Risk; Permanent Price Impact; SEC Rule 22e-4 (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2017-12
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Journal Article: Portfolio valuation under liquidity constraints with permanent price impact (2018)
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