Life-Cycle Portfolio Choice with Liquid and Illiquid Financial Assets
AbstractTraditionally quantitative models that have studied households' port- folio choice have focused exclusively on the different risk properties of alternative financial assets. In the present paper we take a different ap- proach and assume that assets also differ in their liquidity. We construct a model where agents face uninsurable idiosyncratic shocks to labor earn- ings. Earnings are paid in the form of a liquid asset that is needed to buy consumption goods. A second, risky asset, called stock is also available, however a fixed transaction cost is needed to buy or sell this asset. When the transaction cost is calibrated to match the observed infrequency in households' trading, the model generates patterns of portfolio stock allo- cations over age and wealth that are constant or moderately increasing, thus more in line with the empirical evidence compared to conventional models.
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Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 269.
Length: 52 pages
Date of creation: 2012
Date of revision:
household portfolio choice; self-insurance; cash-in-advance; transaction cost.;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-27 (All new papers)
- NEP-DGE-2012-10-27 (Dynamic General Equilibrium)
- NEP-IAS-2012-10-27 (Insurance Economics)
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