Modeling liquidity effects in discrete time

Umut Cetin and L.C.G. Rogers

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study optimal portfolio choices for an agent with the aim of maximising utility from terminal wealth within a market with liquidity costs. Under some mild conditions, we show the existence of optimal portfolios and that the marginal utility of the optimal terminal wealth serves as a change of measure to turn the marginal price process of the optimal strategy into a martingale. Finally, we illustrate our results numerically in a Cox-Ross-Rubinstein binomial model with liquidity costs and find the reservation ask prices for simple European put options.

Keywords: Liquidity risk; utility maximisation from terminal wealth; Bellman equation; equivalent martingale measure; Cox-Ross-Rubinstein model. (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2007-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Published in Mathematical Finance, January, 2007, 17(1), pp. 15-29. ISSN: 0960-1627

Downloads: (external link)
http://eprints.lse.ac.uk/2844/ Open access version. (application/pdf)

Related works:
Journal Article: MODELING LIQUIDITY EFFECTS IN DISCRETE TIME (2007)
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:ehl:lserod:2844

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().