Hedge-fund management with liquidity constraint

Hugo E. Ramirez, Peter Duck, Paul V. Johnson, Sydney Howell

Producción científica: Contribución a una revistaArtículorevisión exhaustiva


We propose a model for a manager of a hedge fund with a liquidity constraint, where he is seeking to optimize his utility of wealth, with one and multiple period horizons. By using stochastic control techniques, we state the corresponding multi-dimensional Hamilton-Jacobi-Bellman partial differential equation and we use a robust numerical approximation to obtain its unique viscosity solution. We examine the effects of the liquidity constraint on managerial trading decisions and optimal allocation, finding that the manager behaves in a less risky manner. We also calculate the cost of being at sub-optimal positions as the difference in the certainty equivalent payoff for the manager. Moreover, we compare the values of a benchmark hedge fund with another one having a risky asset with a higher rate of return but less liquidity, finding that higher rate of return with a liquidity constraint does not always lead to greater return.

Idioma originalInglés estadounidense
Número de artículo1950026
PublicaciónInternational Journal of Theoretical and Applied Finance
EstadoPublicada - sep. 1 2019

Áreas temáticas de ASJC Scopus

  • Finanzas
  • Economía, econometría y finanzas (todo)


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