Life-cycle portfolio choice with liquid and illiquid financial assets

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.

Claudio Campanale wishes to thank the Ministerio de Economía y Competitividad Grant ECO2012-36719, the Generalitat Valenciana, Conselleria d’Educació, Cultura i Esport grant Prometeo/2013/037 and Collegio Carlo Alberto for financial support and CeRP for generous hospitality during the development of this project.