publication . Preprint . Report . Article . 2013

Portfolio Choice with Illiquid Assets

Andrew Ang; Dimitris Papanikolaou; Mark M. Westerfield;
Open Access
  • Published: 01 Sep 2013
Abstract
We present a model of optimal allocation to liquid and illiquid assets, where illiquidity risk results from the restriction that an asset cannot be traded for intervals of uncertain duration. Illiquidity risk leads to increased and state-dependent risk aversion and reduces the allocation to both liquid and illiquid risky assets. Uncertainty about the length of the illiquidity interval, as opposed to a deterministic nontrading interval, is a primary determinant of the cost of illiquidity. We allow market liquidity to vary from "normal" periods, when all assets are fully liquid, to "illiquidity crises," when some assets can only be traded infrequently. The possibi...
Subjects
free text keywords: Management Science and Operations Research, Strategy and Management, jel:G11, jel:G12, Portfolio, Economics, Optimal allocation, Asset allocation, Risk aversion, Alternative asset, Market liquidity, Financial economics, Arbitrage, Liquidity crisis
Related Organizations
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