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Efficient portfolio valuation incorporating liquidity risk

Author

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  • Yu Tian
  • Ron Rood
  • Cornelis W. Oosterlee

Abstract

According to the theory proposed by Acerbi and Scandolo (2008) [ Quant. Finance , 2008, 8 , 681--692], an asset is described by the so-called Marginal Supply--Demand Curve (MSDC), which is a collection of bid and ask prices according to its trading volumes, and the value of a portfolio is defined in terms of commonly available market data and idiosyncratic portfolio constraints imposed by an investor holding the portfolio. Depending on the constraints, one and the same portfolio could have different values for different investors. As it turns out, within the Acerbi--Scandolo theory, portfolio valuation can be framed as a convex optimization problem. We provide useful MSDC models and show that portfolio valuation can be solved with remarkable accuracy and efficiency.

Suggested Citation

  • Yu Tian & Ron Rood & Cornelis W. Oosterlee, 2013. "Efficient portfolio valuation incorporating liquidity risk," Quantitative Finance, Taylor & Francis Journals, vol. 13(10), pages 1575-1586, October.
    • Handle: RePEc:taf:quantf:v:13:y:2013:i:10:p:1575-1586
    DOI: 10.1080/14697688.2013.779013
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    Cited by:

    1. Hevér, Judit, 2017. "A likviditás és a permanens árhatás szerepe a portfólióértékelésben [The role of liquidity policy and permanent price impact in portfolio valuation]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 594-611.
    2. Rongju Zhang & Nicolas Langren'e & Yu Tian & Zili Zhu & Fima Klebaner & Kais Hamza, 2018. "Local Control Regression: Improving the Least Squares Monte Carlo Method for Portfolio Optimization," Papers 1803.11467, arXiv.org, revised Sep 2018.
    3. Rongju Zhang & Nicolas Langren'e & Yu Tian & Zili Zhu & Fima Klebaner & Kais Hamza, 2016. "Dynamic portfolio optimization with liquidity cost and market impact: a simulation-and-regression approach," Papers 1610.07694, arXiv.org, revised Jun 2019.
    4. Csóka, Péter & Hevér, Judit, 2018. "Portfolio valuation under liquidity constraints with permanent price impact," Finance Research Letters, Elsevier, vol. 26(C), pages 235-241.

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