Portfolio Choice with Market Closure and Implications for Liquidity Premia

53 Pages Posted: 11 Mar 2009 Last revised: 28 May 2013

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

University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 26, 2013

Abstract

Most existing portfolio choice models ignore periodic market closure and the fact that market volatility is significantly higher during trading periods. We show that market closure and the volatility difference across trading and nontrading periods significantly change optimal trading strategies and produce a U-shape trading volume pattern that matches empirical evidence. Furthermore, our model implies that transaction costs can have a first order effect on liquidity premia that is largely comparable to empirical findings. Extensive empirical analysis supports the model's unique prediction that stocks with greater return variance variations across trading and nontrading periods require higher liquidity premia.

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

JEL Classification: 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 (May 26, 2013). Available at SSRN: https://ssrn.com/abstract=1356834 or http://dx.doi.org/10.2139/ssrn.1356834

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

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
102
Abstract Views
984
rank
145,305
PlumX Metrics