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Portfolio Choice in the Presence of Personal Illiquid Projects

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  • Miquel Faig
  • Pauline Shum

Abstract

Personal projects, such as a private business or the purchase of a home, influence individuals portfolio choice. We conduct a theoretical analysis of this influence when financial assets are required to provide liquidity to personal projects. Due to this liquidity consideration, individuals behave in a more riskaverse fashion when there is a large penalty for discontinuing or underinvesting in the final stages of the projects. In addition, using data from the 1995 Survey of Consumer Finances, we find that households that are saving to invest in their own businesses or in their own homes indeed have significantly safer financial portfolios.

Suggested Citation

  • Miquel Faig & Pauline Shum, 2002. "Portfolio Choice in the Presence of Personal Illiquid Projects," Journal of Finance, American Finance Association, vol. 57(1), pages 303-328, February.
    • Handle: RePEc:bla:jfinan:v:57:y:2002:i:1:p:303-328
    DOI: 10.1111/1540-6261.00423
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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