The Endowment Model and Modern Portfolio Theory

49 Pages Posted: 24 Feb 2019

See all articles by Stephen G. Dimmock

Stephen G. Dimmock

Nanyang Technological University - Division of Finance

Neng Wang

Columbia Business School - Finance and Economics

Jinqiang Yang

Columbia University; Shanghai University of Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 7, 2019

Abstract

We develop a dynamic portfolio-choice model with illiquid alternative assets to analyze conditions under which the “Endowment Model,” used by some large institutional investors such as university endowments, does or does not work. The alternative asset has a lock-up, but can be voluntarily liquidated at any time at a cost. Quantitatively, our model’s results match the average level and cross-sectional variation of university endowment funds’ spending and asset allocation decisions. We show that asset allocations and spending crucially depend on the alternative asset’s expected excess return, risk unspanned by public equity, and investors’ preferences for inter-temporal spending smoothing.

Keywords: endowment model, portfolio choice, illiquid assets, illiquidity, modern portfolio theory, asset allocation, alternative assets, alternative investments

JEL Classification: G11, G23

Suggested Citation

Dimmock, Stephen G. and Wang, Neng and Yang, Jinqiang, The Endowment Model and Modern Portfolio Theory (February 7, 2019). Available at SSRN: https://ssrn.com/abstract=3330919 or http://dx.doi.org/10.2139/ssrn.3330919

Stephen G. Dimmock (Contact Author)

Nanyang Technological University - Division of Finance ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

Neng Wang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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

Register to save articles to
your library

Register

Paper statistics

Downloads
60
rank
333,297
Abstract Views
208
PlumX Metrics