Portfolio Claustrophobia: Asset Pricing in Markets with Illiquid Assets | Zendy

Francis A. Longstaff | Zendy

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Portfolio Claustrophobia: Asset Pricing in Markets with Illiquid Assets

Author(s) -

Francis A. Longstaff

Publication year - 2009

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.99.4.1119

Subject(s) - portfolio , diversification (marketing strategy) , market liquidity , economics , capital asset pricing model , financial economics , asset (computer security) , consumption based capital asset pricing model , monetary economics , business , computer security , marketing , computer science

Many classes of assets are illiquid or nonmarketable in that they cannot always be traded immediately. Thus, a portfolio position in these becomes at least temporarily irreversible. We study the asset-pricing implications of this type of illiquidity in an exchange economy with heterogeneous agents. In this market, one asset is always liquid. The other asset can be traded initially, but then not again until after a "blackout" period. Illiquidity has a dramatic effect. Agents abandon diversification and choose polarized portfolios instead. The value of liquidity can represent a large portion of the equilibrium price of an asset. (JEL G11, G12)

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