scholarly journals Optimal investment and contingent claim valuation in illiquid markets

2014 ◽  
Vol 18 (4) ◽  
pp. 733-754 ◽  
Author(s):  
Teemu Pennanen
Keyword(s):  
Optimal Investment ◽  
Contingent Claim ◽  
Illiquid Markets ◽  
Contingent Claim Valuation

scholarly journals OPTIMAL INVESTMENT ON FINITE HORIZON WITH RANDOM DISCRETE ORDER FLOW IN ILLIQUID MARKETS

2011 ◽  
Vol 14 (01) ◽  
pp. 17-40 ◽  
Author(s):  
PAUL GASSIAT ◽  
HUYÊN PHAM ◽  
MIHAI SÎRBU
Keyword(s):  
Dynamic Programming ◽  
Optimal Investment ◽  
Market Model ◽  
Programming Approach ◽  
Order Flow ◽  
Short Sale Constraints ◽  
Dynamic Programming Approach ◽  
Short Sale ◽  
Illiquid Markets ◽  
Investor Trading

We study the problem of optimal portfolio selection in an illiquid market with discrete order flow. In this market, bids and offers are not available at any time but trading occurs more frequently near a terminal horizon. The investor can observe and trade the risky asset only at exogenous random times corresponding to the order flow given by an inhomogenous Poisson process. By using a direct dynamic programming approach, we first derive and solve the fixed point dynamic programming equation satisfied by the value function, and then perform a verification argument which provides the existence and characterization of optimal trading strategies. We prove the convergence of the optimal performance, when the deterministic intensity of the order flow approaches infinity at any time, to the optimal expected utility for an investor trading continuously in a perfectly liquid market model with no-short sale constraints.

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