Abstracts

We solve a portfolio choice model in a market where the order flow in each asset has a linear price impact in all assets. For small illiquidity cost we derive the asymptotic equivalent safe rate and an asymptotically optimal policy, which trades towards the frictionless portfolio only if the cross-impact between assets is proportional to their covariance. Trading volume approximately follows a multivariate Ornstein-Uhlenbeck process. Leverage and short-selling in each asset is endogenously ruled out.