On the strategic behavior of large investors: A mean-variance portfolio approach

Marcelo J. Villena, Lorenzo Reus

Research output: Contribution to journalArticlepeer-review

6 Scopus citations


One key assumption of Markowitz's model is that all traders act as price takers. In this paper, we extend this mean-variance approach in a setting where large investors can move prices. Instead of having an individual optimization problem, we find the investors' Nash equilibrium and redefine the efficient frontier in this new framework. We also develop a simplified application of the general model, with two assets and two investors to shed light on the potential strategic behavior of large and atomic investors. Our findings validate the claim that large investors enhance their portfolio performance in relation to perfect market conditions. Besides, we show under which conditions atomic investors can benefit in relation to the standard setting, even if they have not total influence on their eventual performance. The 'two investors-two assets' setting allows us to quantify performance and do sensitivity analysis regarding investors' market power, risk tolerance and price elasticity of demand. Finally, for a group of well known ETFs, we empirically show how price variations change depending on the volume traded. We also explain how to set up and use our model with real market data.

Original languageEnglish
Pages (from-to)679-688
Number of pages10
JournalEuropean Journal of Operational Research
Issue number2
StatePublished - 16 Oct 2016
Externally publishedYes


  • Investment analysis
  • Large investors
  • Markowitz portfolio allocation
  • Nash equilibrium
  • Strategic behavior


Dive into the research topics of 'On the strategic behavior of large investors: A mean-variance portfolio approach'. Together they form a unique fingerprint.

Cite this