Portfolio Choice With Illiquid Assets
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Portfolio Choice With Illiquid Assets
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Author : Andrew Ang
language : en
Publisher:
Release Date : 2013
Portfolio Choice With Illiquid Assets written by Andrew Ang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with Economics categories.
We present a model of optimal allocation over liquid and illiquid assets, where illiquidity is the restriction that an asset cannot be traded for intervals of uncertain duration. Illiquidity leads to increased and state-dependent risk aversion, and reduces the allocation to both liquid and illiquid risky assets. Uncertainty about the length of the illiquidity interval, as opposed to a deterministic non-trading interval, is a primary determinant of the cost of illiquidity. We allow market liquidity to vary from `normal' periods, when all assets are fully liquid, to 'illiquidity crises,' when some assets can only be traded infrequently. The possibility of a liquidity crisis leads to limited arbitrage in normal times. Investors are willing to forego 2% of their wealth to hedge against illiquidity crises occurring once every ten years.
Portfolio Choice With Illiquid Assets
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Author : Miklós Koren
language : en
Publisher:
Release Date : 2003
Portfolio Choice With Illiquid Assets written by Miklós Koren and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2003 with Asset allocation categories.
Portfolio Choice With Illiquid Assets
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Author : Espen Moen
language : en
Publisher:
Release Date : 2003
Portfolio Choice With Illiquid Assets written by Espen Moen and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2003 with Economics categories.
Illiquid Assets And Optimal Portfolio Choice
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Author : Claudio Tebaldi
language : en
Publisher:
Release Date : 2010
Illiquid Assets And Optimal Portfolio Choice written by Claudio Tebaldi and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.
The presence of illiquid assets, such as human wealth or a family owned business, complicates the problem of portfolio choice. This paper is concerned with the problem of optimal asset allocation and consumption in a continuous time model when one asset cannot be traded. This illiquid asset, which depends on an uninsurable source of risk, provides a liquid dividend. In the case of human capital we can think about this dividend as labor income. The agent is endowed with a given amount of the illiquid asset and with some liquid wealth which can be allocated in a market where there is a risky and a riskless asset. The main point of the paper is that the optimal allocations to the two liquid assets and consumption will critically depend on the endowment and characteristics of the illiquid asset, in addition to the preferences and to the liquid holdings held by the agent. We provide what we believe to be the first analytical solution to this problem when the agent has power utility of consumption and terminal wealth. We also derive the value that the agent assigns to the illiquid asset. The risk adjusted valuation procedure we develop can be used to value both liquid and illiquid assets, as well as contingent claims on those assets.
Life Cycle Portfolio Choice With Liquid And Illiquid Assets
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Author : Claudio Campanale
language : en
Publisher:
Release Date : 2015
Life Cycle Portfolio Choice With Liquid And Illiquid Assets written by Claudio Campanale and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with Liquidity (Economics) categories.
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.
Asset Pricing And Optimal Portfolio Choice In The Presence Of Illiquid Durable Consumption Goods
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Author : Sanford J. Grossman
language : en
Publisher:
Release Date : 1987
Asset Pricing And Optimal Portfolio Choice In The Presence Of Illiquid Durable Consumption Goods written by Sanford J. Grossman and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1987 with Assets (Accounting) categories.
We analyze a model of optimal consumption and portfolio selection in which consumption services are generated by holding a durable good. The durable good is illiquid in that a transaction cost must be paid when the good is sold. It is shown that optimal consumption is not a smooth function of wealth; it is optimal for the consumer to wait until a large change in wealth occurs before adjusting his consumption. As a consequence, the consumption based capital asset pricing model fails to hold. Nevertheless, it is shown that the standard, one factor, market portfolio based capital asset pricing model does hold in this environment. It is shown that the optimal durable level is characterized by three numbers (not random variables), say x, y, and z (where x
Illiquid Assets And Optimal Portfolio Choice
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Author :
language : en
Publisher:
Release Date : 2006
Illiquid Assets And Optimal Portfolio Choice written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006 with categories.
Asset Pricing And Optimal Portfolio Choice In The Presence Of Illiquid Durable Consumption Goods
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Author : Sanford J. Grossman
language : en
Publisher:
Release Date : 2012
Asset Pricing And Optimal Portfolio Choice In The Presence Of Illiquid Durable Consumption Goods written by Sanford J. Grossman and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012 with categories.
We analyze a model of optimal consumption and portfolio selection in which consumption services are generated by holding a durable good. The durable good is illiquid in that a transaction cost must be paid when the good is sold. It is shown that optimal consumption is not a smooth function of wealth; it is optimal for the consumer to wait until a large change in wealth occurs before adjusting his consumption. As a consequence, the consumption based capital asset pricing model fails to hold. Nevertheless, it is shown that the standard, one factor, market portfolio based capital asset pricing model does hold in this environment. It is shown that the optimal durable level is characterized by three numbers (not random variables), say x, y, and z (where x lt; y lt; z). The consumer views the ratio of consumption to wealth (c/W) as his state variable. If this ratio is between x and z, then he does not sell the durable. If c/W is less than x or greater than z, then he sells his durable and buys a new durable of size S so that S/W = y. Thus y is his quot;targetquot; level of c/W. If the stock market moves up enough so that c/W falls below x, then he sells his small durable to buy a larger durable. However, there will be many changes in the value of his wealth for which c/W stays between x and z, and thus consumption does not change. Numerical simulations show that small transactions costs can make consumption changes occur very infrequently. Further, the effect of transactions costs on the demand for risky assets is substantial.
Illiquid Asset Investing
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Author : Andrew Ang
language : en
Publisher:
Release Date : 2013
Illiquid Asset Investing written by Andrew Ang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with categories.
After taking into account biases induced by infrequent trading and selection, it is unlikely that illiquid asset classes have higher risk-adjusted returns than traditional liquid stock and bond markets. On the other hand, there are significant illiquidity premiums within asset classes. Portfolio choice models incorporating illiquidity risk recommend only modest holdings of illiquid assets. Investors should demand high risk premiums for investing in illiquid assets.
Strategic Asset Allocation
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Author : John Y. Campbell
language : en
Publisher: OUP Oxford
Release Date : 2002-01-03
Strategic Asset Allocation written by John Y. Campbell and has been published by OUP Oxford this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002-01-03 with Business & Economics categories.
Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.