Impacts of market impact cost on portfolio selection strategies

• Main Author: Tang, Jingxiang
• Other Authors: PUN Chi Seng
• Format: Final Year Project
• Language: English
• Published: Nanyang Technological University 2021
• Subjects: Science::Mathematics
• Online Access: https://hdl.handle.net/10356/148529
• Institution: Nanyang Technological University

This report studies optimal dynamic portfolio choice with mean-variance analysis in continuous time when there are market impact costs. The optimal policy is hard to characterize, so instead we solved a tractable alternative dynamic portfolio choice problem for a sub-optimal policy. The alternative dynamic portfolio choice problem captures market impact cost in the objective instead of the price dynamics. The alternative problem was solved with two approaches, namely precommitment approach and game theoretic approach, to handle the intrinsic time-inconsistent issue in continuous-time mean-variance analysis. At the end, solution from these two approaches were applied to the original optimal dynamic portfolio choice problem for numerical experiments. The results showed promising performance and help us understand how market impact cost affects investment strategies in continuous-time mean-variance analysis.