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

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

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.

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Cited in

(14)

• Market Influence of Portfolio Optimizers
• Dynamic mean-variance problem with frictions
• Dynamic portfolio optimization with liquidity cost and market impact: a simulation-and-regression approach
• Optimal investment with transient price impact
• Trading with small nonlinear price impact
• Portfolio optimization under liquidity costs
• Numerical approximation for a portfolio optimization problem under liquidity risk and costs
• Optimal Leveraged Portfolio Selection Under Quasi-Elastic Market Impact
• 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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