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Portfolio Choice and Liquidity Constraints

  • Michael Haliassos

    (University of Cyprus and HERMES)

  • Alexander Michaelides

    (University of Cyprus, London School of Economics, CEPR, and HERMES)

We study the infinite-horizon model of household portfolio choice under liquidity constraints and revisit the portfolio specialization puzzle. We show why the puzzle is robust to several model variations, and argue that positive correlation between earnings shocks and stock returns is unlikely to provide an empirically plausible resolution. We find that relatively small fixed costs for stock market entry are sufficient to deter stockholding because, for a plausible range of parameter values, households can achieve desired consumption smoothing with small or zero holdings of stocks. Such costs could arise from informational considerations, sign-up fees, and investor inertia. Copyright 2003 By The Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 44 (2003)
Issue (Month): 1 (February)
Pages: 143-177

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Handle: RePEc:ier:iecrev:v:44:y:2003:i:1:p:143-177
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