Optimal portfolio selection under concave price impact

DOI10.1007/S00245-013-9191-7zbMATH Open1269.93136arXiv1204.4852OpenAlexW2153964652MaRDI QIDQ360368FDOQ360368

Authors: Jin Ma, Qingshuo Song, Jianfeng Zhang, Jing Xu 

Publication date: 26 August 2013

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

Abstract: In this paper we study an optimal portfolio selection problem under instantaneous price impact. Based on some empirical analysis in the literature, we model such impact as a concave function of the trading size when the trading size is small. The price impact can be thought of as either a liquidity cost or a transaction cost, but the concavity nature of the cost leads to some fundamental difference from those in the existing literature. We show that the problem can be reduced to an impulse control problem, but without fixed cost, and that the value function is a viscosity solution to a special type of Quasi-Variational Inequality (QVI). We also prove directly (without using the solution to the QVI) that the optimal strategy exists and more importantly, despite the absence of a fixed cost, it is still in a "piecewise constant" form, reflecting a more practical perspective.

Full work available at URL: https://arxiv.org/abs/1204.4852

Recommendations

• Optimal investment with transient price impact
• Portfolio choice with small temporary and transient price impact
• Nonlinear price impact and portfolio choice
• Portfolio optimization under liquidity costs
• A model of optimal portfolio selection under liquidity risk and price impact

zbMATH Keywords

stochastic optimizationprice impactquasi-variational inequalitytransaction costimpulse controlliquidity riskconcave functionoptimal portfolio selectiontrading size

Mathematics Subject Classification ID

Portfolio theory (91G10) Optimal stochastic control (93E20)

Cites Work

• Reflected solutions of backward SDE's, and related obstacle problems for PDE's
• Title not available (Why is that?)
• A closed-form solution to the problem of super-replication under transaction costs
• Optimal investment and consumption with transaction costs
• Liquidity risk and arbitrage pricing theory
• Survey of Measurable Selection Theorems
• Option hedging for small investors under liquidity costs
• Hedging and Portfolio Optimization in Financial Markets with a Large Trader
• MODELING LIQUIDITY EFFECTS IN DISCRETE TIME
• Optimal Consumption and Portfolio with Both Fixed and Proportional Transaction Costs
• Portfolio optimisation with strictly positive transaction costs and impulse control
• A model of optimal portfolio selection under liquidity risk and price impact
• Optimal Impulse Control of Portfolios
• Hereditary portfolio optimization with taxes and fixed plus proportional transaction costs. II

Cited In (9)

• Market Influence of Portfolio Optimizers
• Dynamic portfolio optimization with liquidity cost and market impact: a simulation-and-regression approach
• Portfolio optimization under liquidity costs
• Portfolio choice with small temporary and transient price impact
• Asymptotics for small nonlinear price impact: A PDE approach to the multidimensional case
• Arbitrage theory for non convex financial market models
• Nonlinear price impact and portfolio choice
• A model of optimal portfolio selection under liquidity risk and price impact
• Optimal Portfolio Execution Strategies and Sensitivity to Price Impact Parameters

This page was built for publication: Optimal portfolio selection under concave price impact

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q360368)