Investing with Liquid and Illiquid Assets

32 Pages Posted: 14 Nov 2014 Last revised: 8 Apr 2016

See all articles by Maxim Bichuch

Maxim Bichuch

State University of New York (SUNY) - Buffalo

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences; University of Bologna - Department of Statistics

Date Written: November 12, 2014

Abstract

We find optimal trading policies for long-term investors with constant relative risk aversion and constant investment opportunities, which include one safe asset, liquid risky assets, and an illiquid risky asset trading with proportional costs. Access to liquid assets creates a diversification motive, which reduces illiquid trading, and a hedging motive, which both reduces illiquid trading and increases liquid trading. A further tempering effect depresses the liquid asset's weight when the illiquid asset's weight is close to ideal, to keep it near that level by reducing its volatility. Multiple liquid assets lead to portfolio separation in four funds: the safe asset, the myopic portfolio, the illiquid asset, and its hedging portfolio.

Keywords: portfolio choice, transaction costs, hedging, illiquidity, fund separation

JEL Classification: G11, G12

Suggested Citation

Bichuch, Maxim and Guasoni, Paolo and Guasoni, Paolo, Investing with Liquid and Illiquid Assets (November 12, 2014). Available at SSRN: https://ssrn.com/abstract=2523538 or http://dx.doi.org/10.2139/ssrn.2523538

Maxim Bichuch

State University of New York (SUNY) - Buffalo ( email )

12 Capen Hall
Buffalo, NY 14260
United States

Paolo Guasoni (Contact Author)

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

University of Bologna - Department of Statistics ( email )

Bologna, 40126
Italy

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