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Portfolio Claustrophobia: Asset Pricing in Markets with Illiquid Assets


  • Francis A. Longstaff


Many classes of assets are illiquid or nonmarketable in that they cannot always be traded immediately. Thus, a portfolio position in these becomes at least temporarily irreversible. We study the asset-pricing implications of this type of illiquidity in an exchange economy with heterogeneous agents. In this market, one asset is always liquid. The other asset can be traded initially, but then not again until after a "blackout" period. Illiquidity has a dramatic effect. Agents abandon diversification and choose polarized portfolios instead. The value of liquidity can represent a large portion of the equilibrium price of an asset. (JEL G11, G12)

Suggested Citation

  • Francis A. Longstaff, 2009. "Portfolio Claustrophobia: Asset Pricing in Markets with Illiquid Assets," American Economic Review, American Economic Association, vol. 99(4), pages 1119-1144, September.
  • Handle: RePEc:aea:aecrev:v:99:y:2009:i:4:p:1119-44 Note: DOI: 10.1257/aer.99.4.1119

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    Cited by:

    1. Adrian Buss & Bernard Dumas, 2013. "The Dynamic Properties of Financial-Market Equilibrium with Trading Fees," NBER Working Papers 19155, National Bureau of Economic Research, Inc.
    2. Chabakauri, Georgy, 2010. "Asset pricing with heterogeneous investors and portfolio constraints," LSE Research Online Documents on Economics 43142, London School of Economics and Political Science, LSE Library.
    3. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, Elsevier.
    4. Andrew Ang & Nicolas P.B. Bollen, 2010. "Locked Up by a Lockup: Valuing Liquidity as a Real Option," Financial Management, Financial Management Association International, vol. 39(3), pages 1069-1096, September.
    5. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
    6. Chen, Linda H. & Dyl, Edward A. & Jiang, George J. & Juneja, Januj A., 2015. "Risk, illiquidity or marketability: What matters for the discounts on private equity placements?," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 41-50.
    7. Deuskar, Prachi & Gupta, Anurag & Subrahmanyam, Marti G., 2011. "Liquidity effect in OTC options markets: Premium or discount?," Journal of Financial Markets, Elsevier, vol. 14(1), pages 127-160, February.
    8. Pattitoni, Pierpaolo & Savioli, Marco, 2011. "Investment choices: Indivisible non-marketable assets and suboptimal solutions," Economic Modelling, Elsevier, vol. 28(6), pages 2387-2394.
    9. Marc Chesney & Alexander Kempf, 2012. "The value of tradeability," Review of Derivatives Research, Springer, vol. 15(3), pages 193-216, October.
    10. Isaenko, Sergei, 2010. "Portfolio choice under transitory price impact," Journal of Economic Dynamics and Control, Elsevier, vol. 34(11), pages 2375-2389, November.
    11. Abudy, Menachem Meni & Raviv, Alon, 2016. "How much can illiquidity affect corporate debt yield spread?," Journal of Financial Stability, Elsevier, vol. 25(C), pages 58-69.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates


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