Discussion Paper Details

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Title: Life-Cycle Portfolio choice with Liquid and Illiquid Assets

Author(s): Claudio Campanale, Carolina Fugazza and Francisco J Gomes

Publication Date: January 2015

Keyword(s): cash-in-advance, household portfolio choice, self-insurance and transaction cost

Programme Area(s): Financial Economics

Abstract: Traditionally, quantitative models that have studied households' portfolio choices have focused exclusively on the different risk properties of alternative financial assets. We introduce differences in liquidity across assets in the standard life-cycle model of portfolio choice. More precisely, in our model, stocks are subject to transaction costs, as considered in recent macro literature. We show that, when these costs are calibrated to match the observed infrequency of households' trading, the model is able to generate patterns of portfolio stock allocation over age and wealth that are constant or moderately increasing, thus more in line with the existing empirical evidence.

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Bibliographic Reference

Campanale, C, Fugazza, C and Gomes, F. 2015. 'Life-Cycle Portfolio choice with Liquid and Illiquid Assets'. London, Centre for Economic Policy Research.