Intergenerational Risk Sharing with Market Liquidity Risk

Daniel Dimitrov ()

No 22-028/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper examines the optimal allocation of risk across generations whose savings mix is subject to illiquidity in the form of uncertain trading costs. We use a stylised two-period OLG framework, where each generation makes a portfolio allocation decision for retirement, and show that illiquidity reduces the range of transferable shocks between generations and thus lowers the benefits of risk-sharing. Higher illiquidity then may justify higher levels of risk sharing to compensate for the trading friction. We still find that a contingent transfers policy based on a reasonably parametrised savings portfolio with liquid and illiquid assets increased aggregate welfare.

Keywords: intergenerational risk sharing; (il)liquidity; stochastic overlapping generations; funded pension plan (search for similar items in EconPapers)
JEL-codes: E21 G11 G23 H55 (search for similar items in EconPapers)
Date: 2022-03-30
New Economics Papers: this item is included in nep-age, nep-dge, nep-fmk, nep-mac and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20220028

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