Asset Allocation and the Liquidity Premium for Illiquid Annuities
AbstractAcademics and practitioners alike have developed numerous techniques for benchmarking investment returns to properly adjust seemingly high numbers for excessive levels of risk. The same, however, cannot be said for liquidity, or the lack thereof. This article develops a model for analyzing the "ex ante" liquidity premium demanded by the holder of an illiquid annuity. The annuity is an insurance product that is akin to a pension savings account with both an accumulation and decumulation phase. We compute the yield (spread) needed to compensate for the utility welfare loss, which is induced by the inability to rebalance and maintain an optimal portfolio when holding an annuity. Our analysis goes beyond the current literature, by focusing on the interaction between time horizon (both deterministic and stochastic), risk aversion, and preexisting portfolio holdings. More specifically, we derive a negative relationship between a greater level of individual risk aversion and the demanded liquidity premium. We also confirm that, "ceteris paribus", the required liquidity premium is an increasing function of the holding period restriction, the subjective return from the market, and is quite sensitive to the individual's endowed (preexisting) portfolio. Copyright The Journal of Risk and Insurance.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by The American Risk and Insurance Association in its journal The Journal of Risk and Insurance.
Volume (Year): 70 (2003)
Issue (Month): 3 ()
Contact details of provider:
Web page: http://www.wiley.com/bw/journal.asp?ref=0022-4367&site=1
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Dus, Ivica, 2008. "Following the rules: Integrating asset allocation and annuitization in retirement portfolios," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 396-408, February.
- Wolfram J. Horneff & Raimond H. Maurer & Olivia S. Mitchell & Michael Z. Stamos, 2007.
"Money in Motion: Dynamic Portfolio Choice in Retirement,"
NBER Working Papers
12942, National Bureau of Economic Research, Inc.
- Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Stamos, Michael Z., 2007. "Money in motion: Dynamic portfolio choice in retirement," CFS Working Paper Series 2007/21, Center for Financial Studies (CFS).
- Wolfram Horneff & Raimond Maurer & Olivia Mitchell & Michael Stamos, 2007. "Money in Motion: Dynamic Portfolio Choice in Retirement," Working Papers wp152, University of Michigan, Michigan Retirement Research Center.
- Wolfram J. Horneff & Raimond H. Maurer & Olivia S. Mitchel & Michael Z. Stamos, 2008. "Asset Allocation and Location over the Life Cycle with Survival-Contingent Payouts," Working Papers wp177, University of Michigan, Michigan Retirement Research Center.
- Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Stamos, Michael Z., 2010. "Variable payout annuities and dynamic portfolio choice in retirement," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(02), pages 163-183, April.
- Wolfram J. Horneff & Raimond H. Maurer & Olivia S. Mitchell & Michael Z. Stamos, 2008. "Asset Allocation and Location over the Life Cycle with Survival-Contingent Payouts," NBER Working Papers 14055, National Bureau of Economic Research, Inc.
- Byoung-Min Kim & Richard Widdows & Tansel Yilmazer, 2005. "The determinants of consumers’ adoption of Internet banking," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.