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MODELING LIQUIDITY EFFECTS IN DISCRETE TIME
Author(s) -
Çetin Umut,
Rogers L. C. G.
Publication year - 2007
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.2007.00292.x
Subject(s) - martingale (probability theory) , market liquidity , economics , portfolio , econometrics , marginal utility , discrete time and continuous time , mathematical economics , microeconomics , mathematics , financial economics , finance , statistics
We study optimal portfolio choices for an agent with the aim of maximizing 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.