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Portfolio Choice with Illiquid Assets

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  • Koren, Miklós
  • Szeidl, Adam

Abstract

The present Paper investigates the effects of incorporating illiquidity in a standard dynamic portfolio choice problem. Lack of liquidity means that an asset cannot be immediately traded at any point in time. We find the portfolio share of financial wealth invested in illiquid assets given the liquidity premium. Benchmark calibrations imply a portfolio share of 2-6% in cash. These numbers are in line with survey data and also with portfolio recommendations by practitioners. We also find that long horizon investors invest more in illiquid assets. Overall, our results suggest that differences between asset classes unrelated to standard price risk may influence portfolio shares.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3795.

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Date of creation: Feb 2003
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Handle: RePEc:cpr:ceprdp:3795

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Keywords: asset pricing; calibration; Liquidity; portfolio choice;

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Cited by:
  1. Adam Szeidl & Raj Chetty, 2005. "Consumption Commitments: Neoclassical Foundations for Habit Formation," 2005 Meeting Papers 122, Society for Economic Dynamics.

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