Life-Cycle Portfolio Choice with Liquid and Illiquid Financial Assets

Claudio Campanale (), Carolina Fugazza () and Francisco Gomes

No 269, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: Traditionally quantitative models that have studied households' port- folio choice have focused exclusively on the different risk properties of alternative financial assets. In the present paper we take a different ap- proach and assume that assets also differ in their liquidity. We construct a model where agents face uninsurable idiosyncratic shocks to labor earn- ings. Earnings are paid in the form of a liquid asset that is needed to buy consumption goods. A second, risky asset, called stock is also available, however a fixed transaction cost is needed to buy or sell this asset. When the transaction cost is calibrated to match the observed infrequency in households' trading, the model generates patterns of portfolio stock allo- cations over age and wealth that are constant or moderately increasing, thus more in line with the empirical evidence compared to conventional models.

Keywords: household portfolio choice; self-insurance; cash-in-advance; transaction cost. (search for similar items in EconPapers)
JEL-codes: D91 G11 H55 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2012
New Economics Papers: this item is included in nep-dge and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Life-cycle portfolio choice with liquid and illiquid financial assets (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:269

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