Portfolio Choice of Large Investors Who Interact Strategically

55 Pages Posted: 20 Jun 2019

See all articles by Giuliano Curatola

Giuliano Curatola

University of Siena - Department of Economics and Statistics; Leibniz Institute for Financial Research SAFE

Date Written: June 15, 2019

Abstract

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

Curatola, Giuliano, Portfolio Choice of Large Investors Who Interact Strategically (June 15, 2019). Available at SSRN: https://ssrn.com/abstract=3404491 or http://dx.doi.org/10.2139/ssrn.3404491

Giuliano Curatola (Contact Author)

University of Siena - Department of Economics and Statistics ( email )

Piazza San Francesco 7
Siena, Siena 53100
Italy

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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