Life-Cycle Portfolio Choice with Liquid and Illiquid Assets

78 Pages Posted: 2 Feb 2015

See all articles by Claudio Campanale

Claudio Campanale

Universidad de Alicante - Faculty of Economic and Business Sciences

Carolina Fugazza

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Center for Research on Pensions and Welfare Policies

Francisco Gomes

London Business School

Date Written: January 2015

Abstract

Traditionally, quantitative models that have studied households' portfolio choices have focused exclusively on the different risk properties of alternative financial assets. We introduce differences in liquidity across assets in the standard life-cycle model of portfolio choice. More precisely, in our model, stocks are subject to transaction costs, as considered in recent macro literature. We show that, when these costs are calibrated to match the observed infrequency of households' trading, the model is able to generate patterns of portfolio stock allocation over age and wealth that are constant or moderately increasing, thus more in line with the existing empirical evidence.

Keywords: cash-in-advance, household portfolio choice, self-insurance, transaction cost

JEL Classification: D91, G11, H55

Suggested Citation

Campanale, Claudio and Fugazza, Carolina and Gomes, Francisco, Life-Cycle Portfolio Choice with Liquid and Illiquid Assets (January 2015). CEPR Discussion Paper No. DP10369, Available at SSRN: https://ssrn.com/abstract=2559310

Claudio Campanale (Contact Author)

Universidad de Alicante - Faculty of Economic and Business Sciences ( email )

Germán Edifcio Bernácer - Ground floor
Campus of San Vicente del Raspeig
Alicante, 03080
Spain

Carolina Fugazza

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Center for Research on Pensions and Welfare Policies ( email )

Via Real Collegio, 30
Moncalieri, Turin - Piedmont 10124
Italy

Francisco Gomes

London Business School ( email )

Institute of Finance and Accounting
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 7724 3317 (Fax)

HOME PAGE: http://www.london.edu/faculty/fgomes

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