Portfolio Choice with Market Closure and Implications for Liquidity Premia | Zendy

Min Dai | Zendy; Peifan Li | Zendy; Liu Hong | Zendy; Yajun Wang | Zendy

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Portfolio Choice with Market Closure and Implications for Liquidity Premia

Author(s) -

Min Dai,

Peifan Li,

Liu Hong,

Yajun Wang

Publication year - 2015

Publication title -

management science

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.954

H-Index - 255

eISSN - 1526-5501

pISSN - 0025-1909

DOI - 10.1287/mnsc.2014.2116

Subject(s) - market liquidity , volatility (finance) , economics , portfolio , market impact , financial economics , transaction cost , order (exchange) , econometrics , monetary economics , market microstructure , finance

Most existing portfolio choice models ignore the prevalent periodic market closure and the fact that market volatility is significantly higher during trading periods. We find that market closure and the volatility difference across trading and nontrading periods significantly change optimal trading strategies. In addition, we numerically demonstrate that transaction costs can have a first order effect on liquidity premia that is largely comparable to empirical findings. Moreover, this effect on liquidity premia increases in the volatility difference, which is supported by our empirical analysis. Journal of Economic Literature Classification Numbers: G11, D11, D91, C61.

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