Portfolio Choice with Illiquid Assets

Koren Miklós () and Adam Szeidl
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Koren Miklós: Harvard University Department of Economics

No 6, Rajk László Szakkollégium Working Papers from Rajk László College

Abstract: The present paper investigates the effects of incorporating illiquidity in a standard dynamic portfolio choice problem. Lack of liquidity means that an asset cannot be immediately traded at any point in time. We find the portfolio share of financial wealth invested in illiquid assets given the liquidity premium. Benchmark calibrations imply a portfolio share of 2 6% in cash. These numbers are in line with survey data and also with portfolio recommendations by practitioners. We also find that long horizon investors invest more in illiquid assets. Overall, our results suggest that differences between asset classes unrelated to standard price risk may influence portfolio shares.

Pages: 29 pages
Date: 2002-02
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Working Paper: Portfolio Choice with Illiquid Assets (2003)
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