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Liquidity and conditional portfolio choice: A nonparametric investigation

Listed author(s):
  • Ghysels, Eric
  • Pereira, João Pedro
Registered author(s):

    This paper studies the relation between liquidity and optimal portfolio allocations. Given that the portfolio problem of a constant relative risk aversion investor does not have a closed-form solution, we use a nonparametric approach to estimate the optimal allocations. Using a sample of NYSE stocks from 1963-2000, we find that the optimal portfolio weight in small stocks is strongly increasing in liquidity at short daily and weekly horizons. This result is consistent for three different measures of liquidity: price impact, dollar volume, and turnover. However, liquidity does not influence the optimal portfolio choice for large stocks, nor for longer monthly investment horizons.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0927-5398(08)00002-9
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    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 15 (2008)
    Issue (Month): 4 (September)
    Pages: 679-699

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    Handle: RePEc:eee:empfin:v:15:y:2008:i:4:p:679-699
    Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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