Trading with Small Price Impact
Portfolio Management
2015-03-31 v4 Analysis of PDEs
Optimization and Control
Trading and Market Microstructure
Abstract
An investor trades a safe and several risky assets with linear price impact to maximize expected utility from terminal wealth. In the limit for small impact costs, we explicitly determine the optimal policy and welfare, in a general Markovian setting allowing for stochastic market, cost, and preference parameters. These results shed light on the general structure of the problem at hand, and also unveil close connections to optimal execution problems and to other market frictions such as proportional and fixed transaction costs.
Keywords
Cite
@article{arxiv.1402.5304,
title = {Trading with Small Price Impact},
author = {Ludovic Moreau and Johannes Muhle-Karbe and H. Mete Soner},
journal= {arXiv preprint arXiv:1402.5304},
year = {2015}
}
Comments
46 pages, to appear in "Mathematical Finance"