Illiquidity, position limits, and optimal investment for mutual funds

Min Dai, Hanqing Jin and Hong Liu

Journal of Economic Theory, 2011, vol. 146, issue 4, 1598-1630

Abstract: We study the optimal trading strategy of mutual funds that face both position limits and differential illiquidity. We provide explicit characterization of the optimal trading strategy and conduct an extensive analytical and numerical analysis of the optimal trading strategy. We show that the optimal trading boundaries are increasing in both the lower and the upper position limits. We find that position limits can affect current trading strategy even when they are not currently binding and other seemingly intuitive trading strategies can be costly. We also examine the optimal choice of position limits.

Keywords: Illiquidity; Portfolio; constraints; Position; limits; Transaction; costs; Mutual; funds; Optimal; investment (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:146:y:2011:i:4:p:1598-1630

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