Price impact, strategic interaction and portfolio choice
The North American Journal of Economics and Finance, 2022, vol. 59, issue C
This paper studies the portfolio choice of two large investors who act strategically because their trading affects interest rates. Each investor chooses her optimal portfolio conditional on the portfolio of the opponent. Equilibrium portfolios and their performance depend on the investor’s characteristics (risk aversion and return impact) and on the characteristics of the opponent (risk aversion and return impact). Depending on the interplay among these characteristics, strategic interaction can (i) increase or decrease risk taking incentives, as compared to the Merton-style portfolio, (ii) induce the more risk-averse investor to invest relatively more in the risky asset and (iii) change the role of inflation-linked bonds from hedging instrument to borrowing opportunity.
Keywords: Portfolio choice; Price impact; Strategic interaction (search for similar items in EconPapers)
JEL-codes: C72 G11 G12 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:59:y:2022:i:c:s1062940821001959
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