Dynamic portfolio selection with market impact costs

This paper concerns optimal dynamic portfolio choice with quadratic utility when there are market impact costs. The optimal policy is difficult to characterize, so we look instead for sub-optimal policies. Our proposed suboptimal policy solves a tractable dynamic portfolio choice problem where the cost of trading is captured in the objective instead of the price dynamics. A multiple time scale asymptotic expansion shows that our proposed policy has sensible structural properties, while numerical experiments show promising performance and robustness properties.