Efficient portfolio valuation incorporating liquidity risk

Yu Tian, Ron Rood and Cornelis Oosterlee

Quantitative Finance, 2013, vol. 13, issue 10, 1575-1586

Abstract: According to the theory proposed by Acerbi and Scandolo (2008) [ Quant. Finance , 2008, 8 , 681--692], an asset is described by the so-called Marginal Supply--Demand Curve (MSDC), which is a collection of bid and ask prices according to its trading volumes, and the value of a portfolio is defined in terms of commonly available market data and idiosyncratic portfolio constraints imposed by an investor holding the portfolio. Depending on the constraints, one and the same portfolio could have different values for different investors. As it turns out, within the Acerbi--Scandolo theory, portfolio valuation can be framed as a convex optimization problem. We provide useful MSDC models and show that portfolio valuation can be solved with remarkable accuracy and efficiency.

Date: 2013
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DOI: 10.1080/14697688.2013.779013

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