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Portfolio Choice in the Presence of Personal Illiquid Projects
Author(s) -
Faig Miquel,
Shum Pauline
Publication year - 2002
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00423
Subject(s) - market liquidity , portfolio , business , safer , finance , marketing , actuarial science , computer security , computer science
Personal projects, such as a private business or the purchase of a home, influence individuals portfolio choice. We conduct a theoretical analysis of this influence when financial assets are required to provide liquidity to personal projects. Due to this liquidity consideration, individuals behave in a more riskaverse fashion when there is a large penalty for discontinuing or underinvesting in the final stages of the projects. In addition, using data from the 1995 Survey of Consumer Finances, we find that households that are saving to invest in their own businesses or in their own homes indeed have significantly safer financial portfolios.