Managing liquidity with portfolio staleness

Giuseppe Buccheri (), Davide Pirino () and Luca Trapin ()
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Giuseppe Buccheri: Universitá degli Studi di Roma Tor Vergata
Davide Pirino: Universitá degli Studi di Roma Tor Vergata
Luca Trapin: Universitá di Bologna

Decisions in Economics and Finance, 2021, vol. 44, issue 1, No 14, 215-239

Abstract: Abstract Liquidity is a risk factor of primary relevance that can significantly affect the asset allocation decisions of investors. In this paper, we introduce the concept of portfolio staleness and propose a simple framework to manage portfolio liquidity, intended as the cost needed to liquidate the portfolio. Within this framework, the traditional minimum variance problem is solved under the additional constraint that portfolio staleness must be smaller than a given threshold. We show that a dynamic asset allocation strategy based on the staleness constrained portfolio can significantly enhance portfolio liquidity over the standard minimum variance solution. Meanwhile, the increase in portfolio risk is limited, generating large liquidity gains per unit of risk.

Keywords: Portfolio liquidity; Investments; Price staleness; HAR (search for similar items in EconPapers)
JEL-codes: C58 G11 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10203-020-00300-z

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