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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- Umut Çetin & Robert Jarrow & Philip Protter, 2004.
"Liquidity risk and arbitrage pricing theory,"
Finance and Stochastics,
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Rodney L. White Center for Financial Research Working Papers
4-96, Wharton School Rodney L. White Center for Financial Research.
- 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 04-96, Wharton School Rodney L. White Center for Financial Research.
- RØdiger Frey, 1998. "Perfect option hedging for a large trader," Finance and Stochastics, Springer, vol. 2(2), pages 115-141.
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- Eckhard Platen & Martin Schweizer, 1998.
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Wiley Blackwell, vol. 8(1), pages 67-84.
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