# Portfolio Choice with Small Temporary and Transient Price Impact

## TL;DR

This paper derives explicit formulas for optimal trading strategies in a model with small temporary and transient price impacts, revealing how these frictions influence portfolio performance and adjustment behavior.

## Contribution

It introduces explicit asymptotic formulas for optimal trading rates considering both temporary and transient impacts, extending prior models.

## Key findings

- Optimal trading rate formulas depend on market impact parameters.
- Performance loss is driven by the volatility of the frictionless target.
- Optimal portfolios exploit deviations of market prices from unaffected levels.

## Abstract

We study portfolio selection in a model with both temporary and transient price impact introduced by Garleanu and Pedersen (2016). In the large-liquidity limit where both frictions are small, we derive explicit formulas for the asymptotically optimal trading rate and the corresponding minimal leading-order performance loss. We find that the losses are governed by the volatility of the frictionless target strategy, like in models with only temporary price impact. In contrast, the corresponding optimal portfolio not only tracks the frictionless optimizer, but also exploits the displacement of the market price from its unaffected level.