OPTIMAL INVESTMENT ON FINITE HORIZON WITH RANDOM DISCRETE ORDER FLOW IN ILLIQUID MARKETS

Paul Gassiat, Huyên Pham and Mihai Sîrbu
Additional contact information
Paul Gassiat: Laboratoire de Probabilités et Modèles Aléatoires, University Paris Diderot, Site Chevaleret, Case 7012, 75205 Paris Cedex 13, France
Huyên Pham: Laboratoire de Probabilités et Modèles Aléatoires, University Paris Diderot, Site Chevaleret, Case 7012, 75205 Paris Cedex 13, France
Mihai Sîrbu: Department of Mathematics, University of Texas at Austin, Austin, TX 78712, USA

Chapter 15 in Finance at Fields, 2012, pp 349-372 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe study the problem of optimal portfolio selection in an illiquid market with discrete order flow. In this market, bids and offers are not available at any time but trading occurs more frequently near a terminal horizon. The investor can observe and trade the risky asset only at exogenous random times corresponding to the order flow given by an inhomogenous Poisson process. By using a direct dynamic programming approach, we first derive and solve the fixed point dynamic programming equation satisfied by the value function, and then perform a verification argument which provides the existence and characterization of optimal trading strategies. We prove the convergence of the optimal performance, when the deterministic intensity of the order flow approaches infinity at any time, to the optimal expected utility for an investor trading continuously in a perfectly liquid market model with no-short sale constraints.

Keywords: Mathematical Finance; Financial Mathematics; Risk Management; Asset Pricing; Computational Finance; Derivatives; Option Pricing; Portfolio Optimization (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789814407892_0015 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789814407892_0015 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789814407892_0015

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().