Investing with Liquid and Illiquid Assets

32 Pages Posted: 14 Nov 2014 Last revised: 8 Apr 2016

Maxim Bichuch

Johns Hopkins University

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences

Date Written: November 12, 2014

Abstract

We find optimal trading policies for long-term investors with constant relative risk aversion and constant investment opportunities, which include one safe asset, liquid risky assets, and an illiquid risky asset trading with proportional costs. Access to liquid assets creates a diversification motive, which reduces illiquid trading, and a hedging motive, which both reduces illiquid trading and increases liquid trading. A further tempering effect depresses the liquid asset's weight when the illiquid asset's weight is close to ideal, to keep it near that level by reducing its volatility. Multiple liquid assets lead to portfolio separation in four funds: the safe asset, the myopic portfolio, the illiquid asset, and its hedging portfolio.

Keywords: portfolio choice, transaction costs, hedging, illiquidity, fund separation

JEL Classification: G11, G12

Suggested Citation

Bichuch, Maxim and Guasoni, Paolo, Investing with Liquid and Illiquid Assets (November 12, 2014). Available at SSRN: https://ssrn.com/abstract=2523538 or http://dx.doi.org/10.2139/ssrn.2523538

Maxim Bichuch

Johns Hopkins University ( email )

United States

Paolo Guasoni (Contact Author)

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

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