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Modeling liquidity effects in discrete time

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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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:
Additional Information: © 2007 The Authors. Journal compilation © 2007 Blackwell Publishing Inc.
Library of Congress subject classification: H Social Sciences > HG Finance
Q Science > QA Mathematics
Sets: Departments > Statistics
Date Deposited: 06 Nov 2007

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