Portfolio Choice and Liquidity Constraints

Michael Haliassos and Alexander Michaelides

No 2822, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the infinite horizon model of household portfolio choice under liquidity constraints and revisit the portfolio specialization puzzle for impatient consumers with access to riskless and risky assets. We consider a labour income process that allows us to decompose the consumption and portfolio effects of permanent and transitory shocks to labour income and show their interaction with liquidity constraints and their relative importance in producing precautionary effects and the portfolio specialization result. We show why the puzzle has proved robust for a number of model variations attempted in the literature, and argue that positive correlation between earnings shocks and stock returns is unlikely to provide a plausible resolution. We then offer an alternative explanation for observed stock holding patterns and the slow emergence of an equity culture. Specifically, we find that relatively small, fixed, stock market entry costs are sufficient to deter households from participating in the stock market. Such entry costs could arise, for example, from informational considerations, sign-up fees and investor inertia.

Keywords: Buffer stock saving; Entry costs; Liquidity constraints; Portfolio choice; Precautionary saving (search for similar items in EconPapers)
JEL-codes: E20 G11 (search for similar items in EconPapers)
Date: 2001-04
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Portfolio Choice and Liquidity Constraints (2003)
Working Paper: PORTFOLIO CHOICE AND LIQUIDITY CONSTRAINTS (2000)
Working Paper: Portfolio Choice and Liquidity Constraints (1999)
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