MODELING LIQUIDITY EFFECTS IN DISCRETE TIME

Umut Çetin and L. C. G. Rogers

Mathematical Finance, 2007, vol. 17, issue 1, 15-29

Abstract: We study optimal portfolio choices for an agent with the aim of maximizing utility from terminal wealth within a market with liquidity costs. Under some mild conditions, we show the existence of optimal portfolios and that the marginal utility of the optimal terminal wealth serves as a change of measure to turn the marginal price process of the optimal strategy into a martingale. Finally, we illustrate our results numerically in a Cox–Ross–Rubinstein binomial model with liquidity costs and find the reservation ask prices for simple European put options.

Date: 2007
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Citations: View citations in EconPapers (32)

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https://doi.org/10.1111/j.1467-9965.2007.00292.x

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Working Paper: Modeling liquidity effects in discrete time (2007)
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