2017/05/31 by Ibrahim Ekren, Johannes Muhle-Karbe · 1 citation
Economics, Econometrics and Finance · Mathematics · #q-fin.PM #math.OC #msc:91G10 #msc:91G80 #msc:35K55
published as Mathematical Finance 29.4 (2019): 1066-1115
arxiv created 2020/04/14 · arxiv updated 2020/04/15
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.