Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Market Influence of Portfolio Optimizers

Market Influence of Portfolio Optimizers The paper reports on a study of the feedback effects induced by portfolio optimizers on the underlying asset prices. Through their interaction with reference traders, who trade based on some aggregate incomes process, they are assumed to move asset prices away from the standard log‐normal model. With market clearing as the main constraint, the approximate dynamics of the asset price are solved analytically assuming that the wealth of the portfolio optimizers is small relative to the total market capitalization of the stock. The influence of portfolio optimizers when their wealth is not so small is also calculated numerically. There is good agreement between the numerical and analytical results when the wealth of the optimizers is small. It is found that portfolio optimizers influence the price of the risky asset so as to decrease its volatility. The optimal allocation to the risky asset also changes as a result of the portfolio optimizers' actions. In general, it is advantageous to hold more of the risky asset, relative to the log normal Merton model. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematical Finance Taylor & Francis

Market Influence of Portfolio Optimizers

Nayak, Suhas; Papanicolaou, George
Applied Mathematical Finance , Volume 15 (1): 20 – Feb 1, 2008
Download PDF
20 pages

Market Influence of Portfolio Optimizers

Abstract

The paper reports on a study of the feedback effects induced by portfolio optimizers on the underlying asset prices. Through their interaction with reference traders, who trade based on some aggregate incomes process, they are assumed to move asset prices away from the standard log‐normal model. With market clearing as the main constraint, the approximate dynamics of the asset price are solved analytically assuming that the wealth of the portfolio optimizers is small relative to the...
Loading next page...
 
/lp/taylor-francis/market-influence-of-portfolio-optimizers-Xz6M0vvDRw
Publisher
Taylor & Francis
Copyright
Copyright Taylor & Francis Group, LLC
ISSN
1466-4313
eISSN
1350-486X
DOI
10.1080/13504860701269285
Publisher site
See Article on Publisher Site

Abstract

The paper reports on a study of the feedback effects induced by portfolio optimizers on the underlying asset prices. Through their interaction with reference traders, who trade based on some aggregate incomes process, they are assumed to move asset prices away from the standard log‐normal model. With market clearing as the main constraint, the approximate dynamics of the asset price are solved analytically assuming that the wealth of the portfolio optimizers is small relative to the total market capitalization of the stock. The influence of portfolio optimizers when their wealth is not so small is also calculated numerically. There is good agreement between the numerical and analytical results when the wealth of the optimizers is small. It is found that portfolio optimizers influence the price of the risky asset so as to decrease its volatility. The optimal allocation to the risky asset also changes as a result of the portfolio optimizers' actions. In general, it is advantageous to hold more of the risky asset, relative to the log normal Merton model.

Journal

Applied Mathematical Finance – Taylor & Francis

Published: Feb 1, 2008

Keywords: Hamilton–Jacobi–Bellman equation; feedback; portfolio optimization

There are no references for this article.