Optimal portfolio selection under concave price impact

DOI10.1007/S00245-013-9191-7MaRDI QIDQ360368zbMATH OpenOpenAlexFDO

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)

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

zbMATH Keywords

concave functionimpulse controlliquidity riskoptimal portfolio selectionprice impactquasi-variational inequalitystochastic optimizationtrading sizetransaction cost

Mathematics Subject Classification ID

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

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.

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

Cites work

• A closed-form solution to the problem of super-replication under transaction costs
• A model of optimal portfolio selection under liquidity risk and price impact
• Hedging and Portfolio Optimization in Financial Markets with a Large Trader
• Hereditary portfolio optimization with taxes and fixed plus proportional transaction costs. II
• scientific article; zbMATH DE number 1095739 (Why is no real title available?)
• Liquidity risk and arbitrage pricing theory
• MODELING LIQUIDITY EFFECTS IN DISCRETE TIME
• Optimal Consumption and Portfolio with Both Fixed and Proportional Transaction Costs
• Optimal Impulse Control of Portfolios
• Optimal investment and consumption with transaction costs
• Option hedging for small investors under liquidity costs
• Portfolio optimisation with strictly positive transaction costs and impulse control
• Reflected solutions of backward SDE's, and related obstacle problems for PDE's
• Survey of Measurable Selection Theorems

Cited in

(15)

• Dynamic mean-variance problem with frictions
• Trading with small nonlinear price impact
• Arbitrage theory for non convex financial market models
• A model of optimal portfolio selection under liquidity risk and price impact
• Numerical approximation for a portfolio optimization problem under liquidity risk and costs
• Market Influence of Portfolio Optimizers
• Optimal Portfolio Execution Strategies and Sensitivity to Price Impact Parameters
• Optimal investment with transient price impact
• Nonlinear price impact and portfolio choice
• Portfolio choice with small temporary and transient price impact
• Dynamic portfolio optimization with liquidity cost and market impact: a simulation-and-regression approach
• Portfolio optimization under liquidity costs
• Asymptotics for small nonlinear price impact: A PDE approach to the multidimensional case
• Optimal Leveraged Portfolio Selection Under Quasi-Elastic Market Impact
• On general financial markets with concave transactions costs

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)