Managing Liquidity with Portfolio Staleness
33 Pages Posted: 24 Oct 2018 Last revised: 23 Mar 2019
Date Written: March 1, 2019
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: Suggested Citation