Showing 1 - 10 of 30
We show that wealth processes in the block-shaped order book model of Obizhaeva/Wang converge to their counterparts in the reduced-form model proposed by Almgren/Chriss, as the resilience of the order book tends to infinity. As an application of this limit theorem, we explain how to reduce...
Persistent link: https://www.econbiz.de/10010931984
A shadow price is a process lying within the bid/ask prices of a market with proportional transaction costs, such that maximizing expected utility from consumption in the frictionless market with this price process leads to the same maximal utility as in the original market with transaction...
Persistent link: https://www.econbiz.de/10008533478
An investor with constant absolute risk aversion trades a risky asset with general It\^o-dynamics, in the presence of small proportional transaction costs. In this setting, we formally derive a leading-order optimal trading policy and the associated welfare, expressed in terms of the local...
Persistent link: https://www.econbiz.de/10010600043
For utility maximization problems under proportional transaction costs, it has been observed that the original market with transaction costs can sometimes be replaced by a frictionless "shadow market" that yields the same optimal strategy and utility. However, the question of whether or not this...
Persistent link: https://www.econbiz.de/10009372110
Kramkov and Sirbu (2006, 2007) have shown that first-order approximations of power utility-based prices and hedging strategies can be computed by solving a mean-variance hedging problem under a specific equivalent martingale measure and relative to a suitable numeraire. In order to avoid the...
Persistent link: https://www.econbiz.de/10008579091
We investigate the general structure of optimal investment and consumption with small proportional transaction costs. For a safe asset and a risky asset with general continuous dynamics, traded with random and time-varying but small transaction costs, we derive simple formal asymptotics for the...
Persistent link: https://www.econbiz.de/10010630547
We consider the performance of non-optimal hedging strategies in exponential L\'evy models. Given that both the payoff of the contingent claim and the hedging strategy admit suitable integral representations, we use the Laplace transform approach of Hubalek et al. (2006) to derive semi-explicit...
Persistent link: https://www.econbiz.de/10008469756
We consider the problem of maximizing expected utility from terminal wealth in models with stochastic factors. Using martingale methods and a conditioning argument, we determine the optimal strategy for power utility under the assumption that the increments of the asset price are independent...
Persistent link: https://www.econbiz.de/10008472194
We provide a new characterization of mean-variance hedging strategies in a general semimartingale market. The key point is the introduction of a new probability measure $P^{\star}$ which turns the dynamic asset allocation problem into a myopic one. The minimal martingale measure relative to...
Persistent link: https://www.econbiz.de/10005098782
We determine the variance-optimal hedge when the logarithm of the underlying price follows a process with stationary independent increments in discrete or continuous time. Although the general solution to this problem is known as backward recursion or backward stochastic differential equation,...
Persistent link: https://www.econbiz.de/10005083742