Portfolio Choice with Small Temporary and Transient Price Impact

44 Pages Posted: 2 May 2017 Last revised: 9 Mar 2018

See all articles by Ibrahim Ekren

Ibrahim Ekren

Florida State University

Johannes Muhle-Karbe

Imperial College London - Department of Mathematics

Date Written: March 6, 2018

Abstract

We study portfolio selection in a model with both temporary and transient price impact introduced by Garleanu and Pedersen (2016). In the large-liquidity limit where both frictions are small, we derive explicit formulas for the asymptotically optimal trading rate and the corresponding minimal leading-order performance loss. We find that the losses are governed by the volatility of the frictionless target strategy, like in models with only temporary price impact. In contrast, the corresponding optimal portfolio not only tracks the frictionless optimizer, but also exploits the displacement of the market price from its unaffected level.

Keywords: Portfolio Choice, Temporary Price Impact, Transient Price Impact, Asymptotics

JEL Classification: G11, G12, G23, C61

Suggested Citation

Ekren, Ibrahim and Muhle-Karbe, Johannes, Portfolio Choice with Small Temporary and Transient Price Impact (March 6, 2018). Available at SSRN: https://ssrn.com/abstract=2961282 or http://dx.doi.org/10.2139/ssrn.2961282

Ibrahim Ekren

Florida State University ( email )

1017 Academic Way,
224 LOVE Building
Tallahassee, FL 32306
United States
7342741176 (Phone)

Johannes Muhle-Karbe (Contact Author)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

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