Modeling liquidity effects in discrete time
We study optimal portfolio choices for an agent with the aim of maximising utility from terminal wealth within a market with liquidity costs. Under some mild conditions, we show the existence of optimal portfolios and that the marginal utility of the optimal terminal wealth serves as a change of measure to turn the marginal price process of the optimal strategy into a martingale. Finally, we illustrate our results numerically in a Cox-Ross-Rubinstein binomial model with liquidity costs and find the reservation ask prices for simple European put options.
|Date of creation:||Jan 2007|
|Publication status:||Published in Mathematical Finance, January, 2007, 17(1), pp. 15-29. ISSN: 0960-1627|
|Contact details of provider:|| Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.|
Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Umut Çetin & Robert Jarrow & Philip Protter, 2004.
"Liquidity risk and arbitrage pricing theory,"
Finance and Stochastics,
Springer, vol. 8(3), pages 311-341, 08.
- RØdiger Frey, 1998. "Perfect option hedging for a large trader," Finance and Stochastics, Springer, vol. 2(2), pages 115-141.
- Cuoco, Domenico & Cvitanic, Jaksa, 1998.
"Optimal consumption choices for a 'large' investor,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 22(3), pages 401-436, March.
- Domenico Cuoco & Jaksa Cvitanic, . "Optimal Consumption Choices for a "Large" Investor," Rodney L. White Center for Financial Research Working Papers 4-96, Wharton School Rodney L. White Center for Financial Research.
- Domenico Cuoco & Jaksa Cvitanic, . "Optimal Consumption Choices for a "Large" Investor," Rodney L. White Center for Financial Research Working Papers 04-96, Wharton School Rodney L. White Center for Financial Research.
- Eckhard Platen & Martin Schweizer, 1998.
"On Feedback Effects from Hedging Derivatives,"
Wiley Blackwell, vol. 8(1), pages 67-84.
- Rüdiger Frey & Alexander Stremme, 1997. "Market Volatility and Feedback Effects from Dynamic Hedging," Mathematical Finance, Wiley Blackwell, vol. 7(4), pages 351-374.
When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:2844. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LSERO Manager)
If references are entirely missing, you can add them using this form.