31 results found
Muhle-Karbe J, Wang Z, Webster K, 2022, A Leland Model for Delta Hedging in Central Risk Books
Micheli A, Muhle-Karbe J, Neuman E, 2021, Closed-Loop Nash Competition for Liquidity
Herdegen M, Muhle-Karbe J, Stebegg F, 2021, Liquidity Provision with Adverse Selection and Inventory Costs
Gonon L, Muhle-Karbe J, Shi X, 2021, Asset pricing with general transaction costs: Theory and numerics, Mathematical Finance, Vol: 31, Pages: 595-648, ISSN: 0960-1627
We study risk-sharing equilibria with general convex costs on the agents' trading rates. For an infinite-horizon model with linear state dynamics and exogenous volatilities, we prove that the equilibrium returns mean-revert around their frictionless counterparts—the deviation has Ornstein-Uhlenbeck dynamics for quadratic costs whereas it follows a doubly-reflected Brownian motion if costs are proportional. More general models with arbitrary state dynamics and endogenous volatilities lead to multidimensional systems of nonlinear, fully-coupled forward-backward SDEs. These fall outside the scope of known well-posedness results, but can be solved numerically using the simulation-based deep-learning approach of Han, Jentzen, and E (2018). In a calibration to time series of prices and trading volume, realistic liquidity premia are accompanied by a moderate increase in volatility. The effects of different cost specifications are rather similar, justifying the use of quadratic costs as a proxy for other less tractable specifications.
Muhle-Karbe J, Shi X, Yang C, 2020, An Equilibrium Model for the Cross-Section of Liquidity Premia
MuhleKarbe J, Nutz M, Tan X, 2020, Asset pricing with heterogeneous beliefs and illiquidity, Mathematical Finance, Vol: 30, Pages: 1392-1421, ISSN: 0960-1627
Herdegen M, Muhle-Karbe J, Possamaï D, 2020, Equilibrium Asset Pricing with Transaction Costs
Cayé T, Herdegen M, Muhle-Karbe J, 2020, Trading with small nonlinear price impact, Annals of Applied Probability, Vol: 30, Pages: 706-746, ISSN: 1050-5164
We study portfolio choice with small nonlinear price impact on general market dynamics. Using probabilistic techniques and convex duality, we show that the asymptotic optimum can be described explicitly up to the solution of a nonlinear ODE, which identifies the optimal trading speed and the performance loss due to the trading friction. Previous asymptotic results for proportional and quadratic trading costs are obtained as limiting cases. As an illustration, we discuss how nonlinear trading costs affect the pricing and hedging of derivative securities and active portfolio management.
Muhle-Karbe J, Nutz M, Tan X, 2020, Asset Pricing with Heterogeneous Beliefs and Illiquidity
Herrmann S, Muhle-Karbe J, Shang D, et al., 2020, Inventory Management for High-Frequency Trading with Imperfect Competition, SIAM JOURNAL ON FINANCIAL MATHEMATICS, Vol: 11, Pages: 1-26, ISSN: 1945-497X
Guasoni P, Liu R, Muhle-Karbe J, 2019, Who should sell stocks?, Mathematical Finance, Vol: 29, Pages: 448-482, ISSN: 0960-1627
Cohen SN, Henckel T, Menzies GD, et al., 2018, Switching Cost Models as Hypothesis Tests, Economics Letters, ISSN: 0165-1765
Ekren I, Muhle-Karbe J, 2018, Portfolio Choice with Small Temporary and Transient Price Impact, Mathematical Finance, ISSN: 0960-1627
Belak C, Muhle-Karbe J, Ou K, 2018, Optimal Trading with General Signals and Liquidation in Target Zone Models
Bank P, Ekren I, Muhle-Karbe J, 2018, Liquidity in competitive dealer markets
We study a continuous-time version of the intermediation model of Grossman and Miller (1988). To wit, we solve for the competitive equilibrium prices at which liquidity takers' demands are absorbed by dealers with quadratic inventory costs, who can in turn gradually transfer these positions to an end-user market. This endogenously leads to a model with transient price impact. Smooth, diffusive, and discrete trades all incur finite but nontrivial liquidity costs, and can arise naturally from the liquidity takers' optimization.
Herdegen M, Muhle-Karbe J, 2018, Stability of Radner equilibria with respect to small frictions, Finance and Stochastics, Vol: 22, Pages: 443-502, ISSN: 0949-2984
We study risk-sharing equilibria with trading subject to small proportional transaction costs. We show that the frictionless equilibrium prices also form an “asymptotic equilibrium” in the small-cost limit. More precisely, there exist asymptotically optimal policies for all agents and a split of the trading cost according to their risk aversions for which the frictionless equilibrium prices still clear the market. Starting from a frictionless equilibrium, this allows studying the interplay of volatility, liquidity and trading volume.
Muhle-Karbe J, Nutz M, 2018, A risk-neutral equilibrium leading to uncertain volatility pricing, Finance and Stochastics, Vol: 22, Pages: 281-295, ISSN: 0949-2984
Muhle-Karbe J, Reppen M, Soner HM, 2017, A Primer on Portfolio Choice with Small Transaction Costs, Annual Review of Financial Economics, Vol: 9, Pages: 301-331
Herrmann S, Muhle-Karbe J, 2017, Model uncertainty, recalibration, and the emergence of delta–vega hedging, Finance and Stochastics, Vol: 21, Pages: 873-930, ISSN: 0949-2984
Herdegen M, Muhle-Karbe J, 2017, Sensitivity of Optimal Consumption Streams
Muhle-Karbe J, Webster K, 2017, Information and Inventories in High-Frequency Trading
Liu R, Muhle-Karbe J, Weber M, 2017, Rebalancing with Linear and Quadratic Costs
Ekren I, Liu R, Muhle-Karbe J, 2017, Optimal Rebalancing Frequencies for Multidimensional Portfolios
Moreau L, Muhle-Karbe J, Soner HM, 2017, Trading with Small Price Impact, Mathematical Finance, Vol: 27, Pages: 350-400, ISSN: 0960-1627
Guasoni P, Muhle-Karbe J, Xing H, 2017, ROBUST PORTFOLIOS AND WEAK INCENTIVES IN LONG-RUN INVESTMENTS, Mathematical Finance, Vol: 27, Pages: 3-37, ISSN: 0960-1627
Guasoni P, Muhle-Karbe J, 2015, LONG HORIZONS, HIGH RISK AVERSION, AND ENDOGENOUS SPREADS, Mathematical Finance, Vol: 25, Pages: 724-753, ISSN: 0960-1627
Guasoni P, Muhle-Karbe J, Xing H, 2013, Robust Portfolios and Weak Incentives in Long Run Investments, Boston U. School of Management Research Paper
Gerhold S, Guasoni P, Muhle-Karbe J, et al., 2013, Transaction Costs, Trading Volume, and the Liquidity Premium, Boston U. School of Management Research Paper
Guasoni P, Muhle-Karbe J, 2012, Portfolio Choice with Transaction Costs: A User's Guide, Boston U. School of Management Research Paper
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