Portfolio Choice with Market Closure and Implications for Liquidity Premia

Management Science 62(2):368-386, 2015

50 Pages Posted: 14 Dec 2008 Last revised: 30 Aug 2017

See all articles by Min Dai

Min Dai

National University of Singapore (NUS) - Department of Mathematics

Peifan Li

National University of Singapore (NUS) - Department of Mathematics

Hong Liu

Washington University in St. Louis - Olin Business School; Fudan University - China Institute of Economics and Finance

Yajun Wang

City University of NY, Baruch College, Zicklin School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 3, 2014

Abstract

Most existing portfolio choice models ignore the prevalent periodic market closure and the fact that market volatility is significantly higher during trading periods. We find that market closure and the volatility difference across trading and nontrading periods significantly change optimal trading strategies. In addition, we numerically demonstrate that transaction costs can have a first order effect on liquidity premia that is largely comparable to empirical findings. Moreover, this effect on liquidity premia increases in the volatility difference, which is supported by our empirical analysis.

Keywords: Market Closure, Liquidity Premia, Portfolio Selection, Optimal Investment

JEL Classification: G12, D11, D91, G11, C61

Suggested Citation

Dai, Min and Li, Peifan and Liu, Hong and Wang, Yajun, Portfolio Choice with Market Closure and Implications for Liquidity Premia (November 3, 2014). Management Science 62(2):368-386, 2015. Available at SSRN: https://ssrn.com/abstract=1315708 or http://dx.doi.org/10.2139/ssrn.1315708

Min Dai

National University of Singapore (NUS) - Department of Mathematics ( email )

Singapore

Peifan Li

National University of Singapore (NUS) - Department of Mathematics

Department of Mathematics
Singapore, 117543
Singapore

Hong Liu (Contact Author)

Washington University in St. Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-5883 (Phone)

Fudan University - China Institute of Economics and Finance ( email )

China

Yajun Wang

City University of NY, Baruch College, Zicklin School of Business ( email )

One Bernard Baruch Way
New York, NY 10010
United States

HOME PAGE: http://sites.google.com/site/yajunwangfin/

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