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|
|Date of revision:|
|Publication status:||Published in Mathematical Finance, January, 2007, 17(1), pp. 15-29. ISSN: 0960-1627|
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- Rüdiger Frey & Alexander Stremme, 1997. "Market Volatility and Feedback Effects from Dynamic Hedging," Mathematical Finance, Wiley Blackwell, vol. 7(4), pages 351-374.
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Wiley Blackwell, vol. 8(1), pages 67-84.
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