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Portfolio Choice with Illiquid Assets

  • Koren, Miklós
  • Szeidl, Adam

The present Paper investigates the effects of incorporating illiquidity in a standard dynamic portfolio choice problem. Lack of liquidity means that an asset cannot be immediately traded at any point in time. We find the portfolio share of financial wealth invested in illiquid assets given the liquidity premium. Benchmark calibrations imply a portfolio share of 2-6% in cash. These numbers are in line with survey data and also with portfolio recommendations by practitioners. We also find that long horizon investors invest more in illiquid assets. Overall, our results suggest that differences between asset classes unrelated to standard price risk may influence portfolio shares.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3795.

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Date of creation: Feb 2003
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Handle: RePEc:cpr:ceprdp:3795
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  1. Andrew Lo & Harry Mamaysky & Jiang Wang, 2001. "Asset Prices and Trading Volume Under Fixed Transactions Costs," Yale School of Management Working Papers ysm188, Yale School of Management, revised 01 Sep 2009.
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