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Portfolio Choice in the Presence of Personal Illiquid Projects

Author

Listed:
  • Miquel Faig

    (University of Toronto,)

  • Pauline Shum

    (York University)

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 risk-averse 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. Copyright The American Finance Association 2002.

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
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    References listed on IDEAS

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    Cited by:

    1. Eduardo Walker, 2006. "Optimal Portfolios In Defined Contribution Pension Systems," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 9(2), pages 99-129.
    2. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2007. "Portfolio Choice over the Life-Cycle when the Stock and Labor Markets Are Cointegrated," Journal of Finance, American Finance Association, vol. 62(5), pages 2123-2167, October.
    3. Bracke, Philippe & Hilber, Christian A.L. & Silva, Olmo, 2018. "Mortgage debt and entrepreneurship," Journal of Urban Economics, Elsevier, vol. 103(C), pages 52-66.
    4. Luigi Guiso & Michael Haliassos & Tullio Jappelli, 2003. "Household stockholding in Europe: where do we stand and where do we go?," Economic Policy, CEPR;CES;MSH, vol. 18(36), pages 123-170, April.
    5. Huaxiong Huang & Moshe A. Milevsky & Jin Wang, 2008. "Portfolio Choice and Life Insurance: The CRRA Case," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 847-872.
    6. Philippe Bracke & Christian Hilber & Olmo Silva, 2012. "Homeownerhip and Entrepreneurship," SERC Discussion Papers 0103, Spatial Economics Research Centre, LSE.
    7. Hung, Mao-Wei & Liu, Yu-Jane & Tsai, Chia-Fen, 2012. "Managerial personal diversification and portfolio equity incentives," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 38-64.
    8. Raffaele Miniaci & Sergio Pastorello, 2010. "Mean-variance econometric analysis of household portfolios," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(3), pages 481-504.
    9. Luca Benzoni & Olena Chyruk, 2009. "Investing over the life cycle with long-run labor income risk," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 29-43.
    10. Alexander Klos & Martin Weber, 2006. "Portfolio Choice in the Presence of Non-Tradable Income: An Experimental Analysis," German Economic Review, Verein für Socialpolitik, vol. 7, pages 427-448, November.
    11. Hemert, Otto van & Jong, Franck de & Driessen, Joost, 2005. "Dynamic portfolio and mortgage choice for homeowners," LSE Research Online Documents on Economics 24650, London School of Economics and Political Science, LSE Library.
    12. Shum, Pauline & Faig, Miquel, 2006. "What explains household stock holdings?," Journal of Banking & Finance, Elsevier, vol. 30(9), pages 2579-2597, September.
    13. Mayssun El-Attar & Markus Poschke, 2011. "Trust and the Choice Between Housing and Financial Assets: Evidence from Spanish Households," Review of Finance, European Finance Association, vol. 15(4), pages 727-756.
    14. Iwaisako, Tokuo, 2009. "Household portfolios in Japan," Japan and the World Economy, Elsevier, vol. 21(4), pages 373-382, December.
    15. Wolfram Horneff & Raimond Maurer & Michael Stamos, 2006. "Life-Cycle Asset Allocation with Annuity Markets: Is Longevity Insurance a Good Deal?," Working Papers wp146, University of Michigan, Michigan Retirement Research Center.
    16. Xiaoyu Chen & Xiaohao Ji, 2016. "The Effect of House Price on Stock Market Participation in China: Evidence from the CHFS Micro-Data," SFB 649 Discussion Papers SFB649DP2016-056, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    17. Bucciol, Alessandro & Miniaci, Raffaele & Pastorello, Sergio, 2017. "Return expectations and risk aversion heterogeneity in household portfolios," Journal of Empirical Finance, Elsevier, vol. 40(C), pages 201-219.
    18. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2005. "Portfolio Choice over the Life-Cycle in the Presence of 'Trickle Down' Labor Income," NBER Working Papers 11247, National Bureau of Economic Research, Inc.
    19. Bhandari, Gokul & Deaves, Richard, 2008. "Misinformed and informed asset allocation decisions of self-directed retirement plan members," Journal of Economic Psychology, Elsevier, vol. 29(4), pages 473-490, August.
    20. Zvi Bodie & Jérôme Detemple & Marcel Rindisbacher, 2009. "Life-Cycle Finance and the Design of Pension Plans," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 249-286, November.
    21. Horneff, Wolfram J. & Maurer, Raimond H. & Stamos, Michael Z., 2008. "Life-cycle asset allocation with annuity markets," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3590-3612, November.
    22. Berkowitz, Michael K. & Qiu, Jiaping, 2006. "A further look at household portfolio choice and health status," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1201-1217, April.
    23. Markus K. Brunnermeier & Stefan Nagel, 2006. "Do Wealth Fluctuations Generate Time-varying Risk Aversion? Micro-Evidence on Individuals' Asset Allocation," NBER Working Papers 12809, National Bureau of Economic Research, Inc.

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    JEL classification:

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

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