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Portfolio Choice with Illiquid Assets

  • Koren Miklós

    ()

    (Harvard University Department of Economics)

  • Szeidl Ádám

    ()

    (Harvard University Department of Economics, Littauer Center 200, Cambridge MA 02138-3001)

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 Rajk László College in its series Rajk László Szakkollégium Working Papers with number 6.

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Length: 29 pages
Date of creation: Feb 2002
Date of revision:
Handle: RePEc:rlc:rlszwp:6
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