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 original||Inglés estadounidense|
|Número de artículo||1950026|
|Publicación||International Journal of Theoretical and Applied Finance|
|Estado||Publicada - sept. 1 2019|
Áreas temáticas de ASJC Scopus
- Economía, econometría y finanzas (todo)