Managing Liquidity with Portfolio Staleness

33 Pages Posted: 24 Oct 2018 Last revised: 23 Mar 2019

See all articles by Giuseppe Buccheri

Giuseppe Buccheri

Scuola Normale Superiore

Davide Pirino

Department of Economics and Finance, University of Rome "Tor Vergata"

Luca Trapin

Catholic University of Milan

Date Written: March 1, 2019

Abstract

Liquidity is a risk factor of primary relevance that can significantly affect the asset allocation decisions of investors. In this paper, we introduce the concept of portfolio staleness and propose a simple framework to manage portfolio liquidity, intended as the cost needed to liquidate the portfolio. Within this framework, the traditional minimum variance problem is solved under the additional constraint that portfolio staleness must be smaller than a given threshold. We show that a dynamic asset allocation strategy based on the staleness-constrained portfolio can significantly enhance portfolio liquidity over the standard minimum variance solution. Meanwhile, the increase of portfolio risk is limited, generating large liquidity gains per unit of risk.

Keywords: Portfolio liquidity, Investments, price staleness, HAR

JEL Classification: C58, G11

Suggested Citation

Buccheri, Giuseppe and Pirino, Davide and Trapin, Luca, Managing Liquidity with Portfolio Staleness (March 1, 2019). Available at SSRN: https://ssrn.com/abstract=3258486 or http://dx.doi.org/10.2139/ssrn.3258486

Giuseppe Buccheri (Contact Author)

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, 56126
Italy
+39 3341046378 (Phone)

Davide Pirino

Department of Economics and Finance, University of Rome "Tor Vergata" ( email )

Via Columbia 2
Rome, Lazio 00133
Italy

Luca Trapin

Catholic University of Milan ( email )

Largo gemelli 1
Milan, MI Milano 20123
Italy

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