Cetin, Umut 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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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 |
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| Official URL: | http://www.blackwellpublishing.com/journal.asp?ref... |
| Additional Information: | © 2007 The Authors. Journal compilation © 2007 Blackwell Publishing Inc. |
| Uncontrolled Keywords: | Liquidity risk, utility maximisation from terminal wealth, Bellman equation, equivalent martingale measure, Cox-Ross-Rubinstein model. |
| Library of Congress subject classification: | H Social Sciences > HG Finance Q Science > QA Mathematics |
| Sets: | Departments > Statistics |
| Rights: | http://www.lse.ac.uk/library/rights/LSERO.htm |
| URL: | http://eprints.lse.ac.uk/2844/ |
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