We consider the stochastic control problem of how to optimally close a large asset position in an illiquid market with price impact. We assume that the risk attributed to an open position depends on the price evolvement since the beginning of the trading period. Within a continuous-time model...

We show in a fairly general setting of a buyer and seller with the same preferences trading two related assets so as to share volatility risk that illiquidity and virtually all impediments to trade cannot be priced. This is because the buying and selling counterparties must both be optimizing....

We consider a large trader liquidating a portfolio using a transparent trading venue with price impact and a dark pool with execution uncertainty. The optimal execution strategy uses both venues continuously, with dark pool orders over-/underrepresenting the portfolio size depending on return...

In the standard approach to fund valuation, it is often assumed that markets are perfectly liquid and hence assets have unique prices. In practice, however, as has been widely documented, this is not the case. Asset values are impacted by deterioration of market liquidity (market depth)....

In this paper, we develop the conic finance framework for optimal execution of a large portfolio in an illiquid market. We extend the classical optimal execution results by considering stochastic exogenous liquidity effects as well as temporary price impact functions. We depart from the...

Asset-pricing models with volume are challenged by the high turnover-rates in real stock markets. We develop an asset-pricing framework with heterogeneous risk preferences and show that liquidity and turnover increase with heterogeneity to a maximum, and then decline. With U.S. parameters,...

In this paper, we show both theoretically and empirically that the size of over-the-counter (OTC) markets can be reduced without affecting individual net positions. First, we find that the networked nature of these markets generates an excess of notional obligations between the aggregate gross...

Using a real-time random regime shift technique, we identify and discuss two different regimes in the dynamics of credit spreads during 2002-2012: a liquidity regime and a default regime. Both regimes contribute to the patterns observed in credit spreads. The liquidity regime seems to explain...

We study a multi-player stochastic differential game, where agents interact through their joint price impact on an asset that they trade to exploit a common trading signal. In this context, we prove that a closed-loop Nash equilibrium exists if the price impact parameter is small enough....

The trend in the world real interest rate for safe and liquid assets fluctuated close to 2 percent for more than a century, but has dropped significantly over the past three decades. This decline has been common among advanced economies, as trends in real interest rates across countries have...