Portfolio Choice with Market Closure and Implications for Liquidity Premia

Min Dai, Peifan Li (), Hong Liu () and Yajun Wang ()
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Peifan Li: Department of Mathematics, National University of Singapore, Singapore 119076
Hong Liu: Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130; and China Academy of Financial Research, Shanghai 200030, China
Yajun Wang: Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742

Management Science, 2016, vol. 62, issue 2, 368-386

Abstract: Most existing portfolio choice models ignore the prevalent periodic market closure and the fact that market volatility is significantly higher during trading periods. We find that market closure and the volatility difference across trading and nontrading periods significantly change optimal trading strategies. In addition, we demonstrate numerically that transaction costs can have a first-order effect on liquidity premia that is largely comparable to empirical findings. Moreover, this effect on liquidity premia increases in the volatility difference, which is supported by our empirical analysis. This paper was accepted by Jerome Detemple, finance .

Keywords: portfolio choice; market closure; volatility dynamics; liquidity premia (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (19)

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