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Discussion Paper Details

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Title: Portfolio Choice with Illiquid Assets

Author(s): Miklós Koren and Adam Szeidl

Publication Date: February 2003

Keyword(s): asset pricing, calibration, Liquidity and portfolio choice

Programme Area(s): Transition Economics

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.

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Bibliographic Reference

Koren, M and Szeidl, A. 2003. 'Portfolio Choice with Illiquid Assets'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3795