Publication

Price impact and portfolio impact

Semyon Malamud
2011
Journal Articles

Abstract

We study survival, price impact, and portfolio impact in heterogeneous economies. We show that, under the equilibrium risk-neutral measure, long-run price impact is in fact equivalent to survival, whereas long-run portfolio impact is equivalent to survival under an agent-specific, wealth-forward measure. These results allow us to show that price impact and portfolio impact are two independent concepts: a nonsurviving agent with no long-run price impact can have a significant long-run impact on other agents' optimal portfolios. (C) 2010 Elsevier B.V. All rights reserved.

Official source

https://infoscience.epfl.ch/entities/publication/c990909a-e18e-4f8d-ac71-834b6cf5541e

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Semyon Malamud
2011
Journal Articles

Abstract

Official source

https://infoscience.epfl.ch/entities/publication/c990909a-e18e-4f8d-ac71-834b6cf5541e

About this result

Related concepts (17)

Modern portfolio theory

Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning only one type. Its key insight is that an asset's risk and return should not be assessed by itself, but by how it contributes to a portfolio's overall risk and return.

Risk-neutral measure

In mathematical finance, a risk-neutral measure (also called an equilibrium measure, or equivalent martingale measure) is a probability measure such that each share price is exactly equal to the discounted expectation of the share price under this measure. This is heavily used in the pricing of financial derivatives due to the fundamental theorem of asset pricing, which implies that in a complete market, a derivative's price is the discounted expected value of the future payoff under the unique risk-neutral measure.

Portfolio optimization

Portfolio optimization is the process of selecting the best portfolio (asset distribution), out of the set of all portfolios being considered, according to some objective. The objective typically maximizes factors such as expected return, and minimizes costs like financial risk. Factors being considered may range from tangible (such as assets, liabilities, earnings or other fundamentals) to intangible (such as selective divestment). Modern portfolio theory was introduced in a 1952 doctoral thesis by Harry Markowitz; see Markowitz model.

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