A model for a large investor trading at market indifference prices. I: Single-period case

We develop a single-period model for a large economic agent who trades with market makers at their utility indifference prices. We compute the sensitivities of these market indifference prices with respect to the size of the investor’s order. It turns out that the price impact of an order is determined both by the market makers’ joint risk tolerance and by the variation of individual risk tolerances. On a technical This research was supported in part by the National Science Foundation under grant DMS-0505021. The author also holds a part-time position at the University of Oxford. This research was supported in part by the National Science Foundation under grant DMS-0505414 and by the Oxford-Man Institute for Quantitative Finance at the University of Oxford.