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Life-cycle portfolio choice with liquid and illiquid assets

Journal

Journal of Monetary Economics

Subject

Finance

Authors / Editors

Campanale C;Fugazza C;Gomes F

Biographies

Publisher

Publication Year

2015

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 macroliterature. 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.

Keywords

Household portfolio choice; Self-insurance; Cash-in-advance; Transaction cost

Available on ECCH

No


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