Portfolio Choice of Large Investors Who Interact Strategically
55 Pages Posted: 20 Jun 2019
Date Written: June 15, 2019
This paper studies the portfolio choice of two large investors who act strategically because their trading affects expected stock returns. Each investor chooses her optimal portfolio conditional on the portfolio of the opponent. Equilibrium portfolios and their performance depend on the investor's characteristics, namely risk aversion and return impact, and on the characteristics of the opponent. Depending on the interplay among these characteristics, strategic interaction can i) increase or decrease risk taking incentives, as compared to the Merton-style portfolio, ii) induce the more risk-averse investor to invest relatively more in the risky asset and iii) generate a preference for high-volatility assets.
Keywords: Portfolio Choice; Price Impact; Strategic Interaction
JEL Classification: C71; G11; G12
Suggested Citation: Suggested Citation