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Modeling liquidity effects in discrete time

Cetin, Umut ORCID: 0000-0001-8905-853X and Rogers, L.C.G. (2007) Modeling liquidity effects in discrete time. Mathematical Finance, 17 (1). pp. 15-29. ISSN 0960-1627

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Identification Number: 10.1111/j.1467-9965.2007.00292.x

Abstract

We study optimal portfolio choices for an agent with the aim of maximising utility from terminal wealth within a market with liquidity costs. Under some mild conditions, we show the existence of optimal portfolios and that the marginal utility of the optimal terminal wealth serves as a change of measure to turn the marginal price process of the optimal strategy into a martingale. Finally, we illustrate our results numerically in a Cox-Ross-Rubinstein binomial model with liquidity costs and find the reservation ask prices for simple European put options.

Item Type: Article
Official URL: http://www.blackwellpublishing.com/journal.asp?ref...
Additional Information: © 2007 The Authors. Journal compilation © 2007 Blackwell Publishing Inc.
Divisions: Statistics
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics
Date Deposited: 06 Nov 2007
Last Modified: 20 Sep 2021 02:41
URI: http://eprints.lse.ac.uk/id/eprint/2844

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