What if we knew what the future brings? Optimal investment for a frontrunner with price impact

DOI10.1007/S00245-022-09885-WMaRDI QIDQ2156348zbMATH OpenOpenAlexFDO

Authors Peter Bank, Yan Dolinsky, Miklós Rásonyi

Publication date 18 July 2022

Published in Applied Mathematics and Optimization (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/2108.04291

zbMATH Keywords

price impactinside informationexponential utilityoptimal investmentGaussian Volterra integral equation

Mathematics Subject Classification ID

Portfolio theory (91G10) Utility theory (91B16)

Abstract: In this paper we study optimal investment when the investor can peek some time units into the future, but cannot fully take advantage of this knowledge because of quadratic transaction costs. In the Bachelier setting with exponential utility, we give an explicit solution to this control problem with intrinsically infinite-dimensional memory. This is made possible by solving the dual problem where we make use of the theory of Gaussian Volterra integral equations.

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Cited in

(3)

• Optimal investment with a noisy signal of future stock prices
• The value of foresight
• Duality theory for exponential utility-based hedging in the Almgren-Chriss model

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