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  4. September 2009
  5. Portfolio Claustrophobia: Asset Pricing in Markets with Illiquid Assets

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Portfolio Claustrophobia: Asset Pricing in Markets with Illiquid Assets

  • Francis A. Longstaff
American Economic Review
vol. 99, no. 4, September 2009
(pp. 1119–44)
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Abstract

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)

Citation

Longstaff, Francis A. 2009. "Portfolio Claustrophobia: Asset Pricing in Markets with Illiquid Assets." American Economic Review, 99 (4): 1119–44. DOI: 10.1257/aer.99.4.1119

Additional Materials

JEL Classification

  • G11 Portfolio Choice; Investment Decisions
  • G12 Asset Pricing; Trading volume; Bond Interest Rates