Related papers: The slippage paradox
We revisit optimal execution of an active portfolio in the presence of slippage (aka linear, proportional, or absolute-value) costs. Market efficiency implies a close balance between active alphas and trading costs, so even small changes to…
The effect of proportional transaction costs on systematically generated portfolios is studied empirically. The performance of several portfolios (the index tracking portfolio, the equally-weighted portfolio, the entropy-weighted portfolio,…
This paper studies arbitrage pricing theory in financial markets with implicit transaction costs. We extend the existing theory to include the more realistic possibility that the price at which the investors trade is dependent on the traded…
An investor with constant relative risk aversion trades a safe and several risky assets with constant investment opportunities. For a small fixed transaction cost, levied on each trade regardless of its size, we explicitly determine the…
We investigate the general structure of optimal investment and consumption with small proportional transaction costs. For a safe asset and a risky asset with general continuous dynamics, traded with random and time-varying but small…
An investor with constant absolute risk aversion trades a risky asset with general It\^o-dynamics, in the presence of small proportional transaction costs. In this setting, we formally derive a leading-order optimal trading policy and the…
In a market with one safe and one risky asset, an investor with a long horizon, constant investment opportunities, and constant relative risk aversion trades with small proportional transaction costs. We derive explicit formulas for the…
Constant price impact functions, much used in financial literature, are shown to give rise to paradoxical outcomes since they do not allow for proper predictability removal: for instance the exploitation of a single large trade whose size…
A speculative agent with Prospect Theory preference chooses the optimal time to purchase and then to sell an indivisible risky asset to maximize the expected utility of the round-trip profit net of transaction costs. The optimization…
We consider strategies of investments into options and diffusion market model. It is shown that there exists a correct proportion between "put" and "call" in the portfolio such that the average gain is almost always positive for a generic…
I study the limit of a large random economy, where a set of consumers invests in financial instruments engineered by banks, in order to optimize their future consumption. This exercise shows that, even in the ideal case of perfect…
We consider an optimal trading problem over a finite period of time during which an investor has access to both a standard exchange and a dark pool. We take the exchange to be an order-driven market and propose a continuous-time setup for…
We consider the multi-period portfolio optimization problem with a single asset that can be held long or short. Due to the presence of transaction costs, maximizing the immediate reward at each period may prove detrimental, as frequent…
Automated market makers (AMMs) are smart contracts that automatically trade electronic assets according to a mathematical formula. This paper investigates how an AMM's formula affects the interests of liquidity providers, who endow the AMM…
Duality for robust hedging with proportional transaction costs of path dependent European options is obtained in a discrete time financial market with one risky asset. Investor's portfolio consists of a dynamically traded stock and a static…
This paper studies the equilibrium price of an asset that is traded in continuous time between N agents who have heterogeneous beliefs about the state process underlying the asset's payoff. We propose a tractable model where agents maximize…
American options in a multi-asset market model with proportional transaction costs are studied in the case when the holder of an option is able to exercise it gradually at a so-called mixed (randomised) stopping time. The introduction of…
Under proportional transaction costs, a price process is said to have a consistent price system, if there is a semimartingale with an equivalent martingale measure that evolves within the bid-ask spread. We show that a continuous,…
We consider trading against a hedge fund or large trader that must liquidate a large position in a risky asset if the market price of the asset crosses a certain threshold. Liquidation occurs in a disorderly manner and negatively impacts…
In this paper we study the price dynamics in a simple model of financial markets with heterogeneous agents. We concentrate on how increases in the total number of active traders influences fluctuations of asset prices. We find that a…