DP10369 Life-Cycle Portfolio choice with Liquid and Illiquid Assets

Author(s): Claudio Campanale, Carolina Fugazza, Francisco J Gomes
Publication Date: January 2015
Keyword(s): cash-in-advance, household portfolio choice, self-insurance, transaction cost
JEL(s): D91, G11, H55
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10369

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.