Rebalancing Multiple Assets with Mutual Price Impact

Paolo Guasoni () and Marko H. Weber ()
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Paolo Guasoni: Boston University
Marko H. Weber: Columbia University

Journal of Optimization Theory and Applications, 2018, vol. 179, issue 2, No 11, 618-653

Abstract: Abstract We find asymptotically optimal trading policies for long-term investors with constant relative risk aversion, in a multiple-assets market, where expected returns and covariances are constant, and the execution price of each asset is linear in the trading intensities of all assets. Trading toward the frictionless target is optimal, when the current portfolio differs from the target by a principal portfolio—an eigenvector of the inverse impact matrix times the covariance matrix. Optimal policies approach the frictionless target along nonlinear, power-shaped paths, trading faster in more liquid directions, while tolerating wider oscillations along less liquid directions.

Keywords: Price impact; Long-run; Portfolio choice; Liquidity; 91G10; 91G80 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10957-018-1366-6

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