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Rebalancing Multiple Assets with Mutual Price Impact

Author

Listed:
  • Paolo Guasoni

    (Boston University
    Dublin City University)

  • Marko H. Weber

    (Columbia University)

Abstract

We find asymptotically optimal trading policies for long-term investors with constant relative risk aversion, in a multiple-assets market, where expected returns and covariances are constant, and the execution price of each asset is linear in the trading intensities of all assets. Trading toward the frictionless target is optimal, when the current portfolio differs from the target by a principal portfolio—an eigenvector of the inverse impact matrix times the covariance matrix. Optimal policies approach the frictionless target along nonlinear, power-shaped paths, trading faster in more liquid directions, while tolerating wider oscillations along less liquid directions.

Suggested Citation

  • Paolo Guasoni & Marko H. Weber, 2018. "Rebalancing Multiple Assets with Mutual Price Impact," Journal of Optimization Theory and Applications, Springer, vol. 179(2), pages 618-653, November.
    • Handle: RePEc:spr:joptap:v:179:y:2018:i:2:d:10.1007_s10957-018-1366-6
    DOI: 10.1007/s10957-018-1366-6
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    References listed on IDEAS

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    1. Ludovic Moreau & Johannes Muhle-Karbe & H. Mete Soner, 2017. "Trading With Small Price Impact," Mathematical Finance, Wiley Blackwell, vol. 27(2), pages 350-400, April.
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    Cited by:

    1. Ma, Guiyuan & Siu, Chi Chung & Zhu, Song-Ping, 2022. "Portfolio choice with return predictability and small trading frictions," Economic Modelling, Elsevier, vol. 111(C).
    2. Ben-zhang Yang & Xinjiang He & Nan-jing Huang, 2019. "Equilibrium price and optimal insider trading strategy under stochastic liquidity with long memory," Papers 1901.00345, arXiv.org, revised Jan 2019.
    3. Erhan Bayraktar & Thomas Cayé & Ibrahim Ekren, 2021. "Asymptotics for small nonlinear price impact: A PDE approach to the multidimensional case," Mathematical Finance, Wiley Blackwell, vol. 31(1), pages 36-108, January.

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