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Portfolio Choice with Small Temporary and Transient Price Impact

42 Pages Posted: 2 May 2017  

Ibrahim Ekren

ETH Zurich

Johannes Muhle-Karbe

Carnegie Mellon University - Department of Mathematical Sciences

Date Written: May 1, 2017

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 (May 1, 2017). Available at SSRN: https://ssrn.com/abstract=2961282

Ibrahim Ekren

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Johannes Muhle-Karbe (Contact Author)

Carnegie Mellon University - Department of Mathematical Sciences ( email )

Pittsburgh, PA 15213-3890
United States

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