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Illiquidity, position limits, and optimal investment for mutual funds

Abstract:

We study the optimal trading strategy of mutual funds that face both position limits and differential illiquidity. We provide explicit characterization of the optimal trading strategy and conduct an extensive analytical and numerical analysis of the optimal trading strategy. We show that the optimal trading boundaries are increasing in both the lower and the upper position limits. We find that position limits can affect current trading strategy even when they are not currently binding and oth...

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Publisher copy:
10.1016/j.jet.2011.03.014

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Institution:
University of Oxford
Division:
MPLS
Department:
Mathematical Institute
Role:
Author
Journal:
Journal of Economic Theory
Volume:
146
Issue:
4
Pages:
1598-1630
Publication date:
2011-07-01
DOI:
EISSN:
1095-7235
ISSN:
0022-0531
Source identifiers:
189419
Pubs id:
pubs:189419
UUID:
uuid:350d8e34-ce16-4078-b5d5-ff84004b232d
Local pid:
pubs:189419
Deposit date:
2012-12-19

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