Optimal portfolio selection under concave price impact
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Publication:360368
DOI10.1007/S00245-013-9191-7zbMATH Open1269.93136arXiv1204.4852OpenAlexW2153964652MaRDI QIDQ360368FDOQ360368
Jin Ma, Jianfeng Zhang, Jing Xu, Qingshuo Song
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
stochastic optimizationprice impactquasi-variational inequalitytransaction costimpulse controlliquidity riskconcave functionoptimal portfolio selectiontrading size
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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
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