The Effects of the Introduction of Volume-Based Liquidity Constraints in Portfolio Optimization with Alternative Investments

Diana Barro, Antonella Basso (), Stefania Funari and Guglielmo Alessandro Visentin
Additional contact information
Diana Barro: Department of Economics, Ca’ Foscari University of Venice, 30121 Venice, Italy
Guglielmo Alessandro Visentin: Department of Economics, Ca’ Foscari University of Venice, 30121 Venice, Italy

Mathematics, 2024, vol. 12, issue 15, 1-26

Abstract: Recently, liquidity issues in financial markets and portfolio asset management have attracted much attention among investors and scholars, fuelling a stream of research devoted to exploring the role of liquidity in investment decisions. In this paper, we aim to investigate the effects of introducing liquidity in portfolio optimization problems. For this purpose, first we consider three volume-based liquidity measures proposed in the literature and we build a new one particularly suited to portfolio optimization. Secondly, we formulate an extended version of the Markowitz portfolio selection problem, named mean–variance–liquidity, wherein the goal is to minimize the portfolio variance subject to the usual constraint on the expected portfolio return and an additional constraint on the portfolio liquidity. Thirdly, we consider a sensitivity analysis, with the aim to assess the trade-offs between liquidity and return, on the one hand, and between liquidity and risk, on the other hand. In the second part of the paper, the portfolio optimization framework is applied to a dataset of US ETFs comprising both standard and alternative, often illiquid, investments. The analysis is carried out with all the liquidity measures considered, allowing us to shed light on the relationships among risk, return and liquidity. Finally, we study the effects of the introduction of a Bitcoin ETF, as an asset with an extremely high expected return and risk.

Keywords: portfolio optimization; liquidity measures; return–liquidity opportunity cost; trading volume; alternative investments (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-7390/12/15/2424/pdf (application/pdf)
https://www.mdpi.com/2227-7390/12/15/2424/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jmathe:v:12:y:2024:i:15:p:2424-:d:1449736

Access Statistics for this article

Mathematics is currently edited by Ms. Emma He

More articles in Mathematics from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().