Portfolio Choice with Illiquid Assets

32 Pages Posted: 15 Apr 2003

See all articles by Miklós Koren

Miklós Koren

Princeton University - International Economics Section

Adam Szeidl

Central European University

Date Written: February 2003

Abstract

The present Paper investigates the effects of incorporating illiquidity in a standard dynamic portfolio choice problem. Lack of liquidity means that an asset cannot be immediately traded at any point in time. We find the portfolio share of financial wealth invested in illiquid assets given the liquidity premium. Benchmark calibrations imply a portfolio share of 2-6% in cash. These numbers are in line with survey data and also with portfolio recommendations by practitioners. We also find that long horizon investors invest more in illiquid assets. Overall, our results suggest that differences between asset classes unrelated to standard price risk may influence portfolio shares.

Keywords: Liquidity, asset pricing, portfolio choice, calibration

JEL Classification: G11, G12

Suggested Citation

Koren, Miklós and Szeidl, Adam, Portfolio Choice with Illiquid Assets (February 2003). CEPR Discussion Paper No. 3795. Available at SSRN: https://ssrn.com/abstract=395506

Miklós Koren (Contact Author)

Princeton University - International Economics Section ( email )

Fisher Hall 305
http://miklos.koren.hu/research/
Princeton, NJ 08544
United States

HOME PAGE: http://miklos.koren.hu/research/

Adam Szeidl

Central European University ( email )

Nador u. 9.
Budapest H-1051
Hungary
+36 1 327 3000 (Phone)
+36 1 327 3232 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
23
Abstract Views
1,464
PlumX Metrics