Rebalancing Multiple Assets with Mutual Price Impact

24 Pages Posted: 15 Feb 2015 Last revised: 22 Dec 2016

See all articles by Paolo Guasoni

Paolo Guasoni

Dublin City University - School of Mathematical Sciences; Boston University - Department of Mathematics and Statistics

Marko Weber

National University of Singapore (NUS) - Department of Mathematics

Date Written: December 21, 2016

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 towards the frictionless target is optimal when the current portfolio differs from the target by a principal portfolio - an eigenvector of the inverse price-impact times the covariance matrices. 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.

Keywords: price impact, long-run, portfolio choice, liquidity

JEL Classification: G11, G12

Suggested Citation

Guasoni, Paolo and Weber, Marko, Rebalancing Multiple Assets with Mutual Price Impact (December 21, 2016). Available at SSRN: https://ssrn.com/abstract=2564624 or http://dx.doi.org/10.2139/ssrn.2564624

Paolo Guasoni (Contact Author)

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Marko Weber

National University of Singapore (NUS) - Department of Mathematics ( email )

Department of Mathematics
Singapore, 117543
Singapore

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