Life-cycle portfolio choice with liquid and illiquid financial assets

Campanale, C, Fugazza, C and Gomes, F (2015) Life-cycle portfolio choice with liquid and illiquid financial assets. Journal of Monetary Economics, 71. pp. 67-83. ISSN 0304-3932

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.