The Endowment Model and Modern Portfolio Theory

52 Pages Posted: 24 Feb 2019 Last revised: 13 Sep 2021

See all articles by Stephen G. Dimmock

Stephen G. Dimmock

National University of Singapore; Asian Bureau of Finance and Economic Research (ABFER)

Neng Wang

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)

Jinqiang Yang

Columbia University; Shanghai University of Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 22, 2021

Abstract

We develop a dynamic portfolio-choice model with illiquid alternative assets to analyze the ``endowment model,'' popularized by university endowment funds. The alternative asset has a lock-up, but can be liquidated prior to the lock-up's expiration by paying a proportional cost. The quantitative results match the average level and cross-sectional variation of endowments' spending and asset allocation decisions. Asset allocation and spending depend on the alternative asset's expected excess return, unspanned risk, and preferences for inter-temporal smoothing. We extend the model to allow crisis states, and show that increased illiquidity during crises causes holdings to deviate significantly from targets allocations.

Keywords: endowment model, portfolio choice, liquidity, modern portfolio theory, asset allocation, alternative assets

JEL Classification: G11, G23

Suggested Citation

Dimmock, Stephen G. and Wang, Neng and Yang, Jinqiang, The Endowment Model and Modern Portfolio Theory (June 22, 2021). Columbia Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3330919 or http://dx.doi.org/10.2139/ssrn.3330919

Stephen G. Dimmock (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
BIZ 1 #7-63
Singapore, 119245
Singapore

Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Neng Wang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4 04-05
1 Business Link
Singapore, 117592
Singapore

Jinqiang Yang

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Shanghai University of Finance and Economics ( email )

Law School, 777 Guoding Road, Yangpu District
Shanghai, AK 200433
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
243
Abstract Views
1,075
rank
149,538
PlumX Metrics