Modeling liquidity effects in discrete time

Preprint
Publisher Website
Google Scholar
  • 1 January 2007
    • preprint
      • Published in RePEc
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.
All Related Versions

This publication has 0 references indexed in Scilit: