401-3910-13L  Illiquid Markets

Semester Spring Semester 2013
Lecturers J. Muhle-Karbe
Periodicity non-recurring course
Language of instruction English


Abstract Classical financial theory is built on "perfectly liquid" markets, where orders of arbitrary size can be executed at the market price. This is a sensible for small investors. For large traders, however, the price impact caused by their orders constitutes a major risk factor. In this seminar, we will look a various price impact models, and discuss how optimal trading strategies should be adjusted.
Objective a) Learn to work through a research article and present it in a scientific talk.
b) Digest the underlying mathematics.
c) Develop the corresponding economic intuition.
Content Overview over recent developments in:
a) price impact modeling
b) stochastic optimization problems for large traders, such as unwinding a large position, portfolio rebalancing, or option hedging
Lecture notes Not available.

The seminar will be based on original research articles.
Literature Topics will be assigned taking into account the participants' interests and prerequisites. Some references include:

Obizhaeva and Wang (2005). Optimal trading strategy and supply/demand dynamics. Available online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=686168

Almgren and Chriss (2000). Optimal execution of portfolio transactions. Available online at
http://www.courant.nyu.edu/~almgren/papers/optliq.pdf

Schied and Schöneborn (2009). Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets.
Available online at
Link

Collin-Dufresne, Daniel, Moallemi, and Saglam (2012). Strategic asset allocation in the presence of transaction costs. Available online at http://www.princeton.edu/~msaglam/dpc.pdf
Prerequisites / Notice Strongly recommended: Foundations for Mathematical Finance, solid knowledge of Ito calculus.

The seminar will be run jointly by Johannes Muhle-Karbe and Ludovic Moreau. We welcome early registration (email to johannes.muhle-karbe@math.ethz.ch).