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American Economic Review: Vol. 99 No. 4 (September 2009)
AER Volume. 99, Issue 4 | 
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Portfolio Claustrophobia: Asset Pricing in Markets with Illiquid Assets
Article 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
DOI: 10.1257/aer.99.4.1119
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)
Article Full-Text Access
Full-text Article
Additional Materials
Online Appendix (88.88 KB)
Authors
Longstaff, Francis A. (UCLA)
JEL Classifications
G11: Portfolio Choice; Investment Decisions
G12: Asset Pricing; Trading volume; Bond Interest Rates
G12: Asset Pricing; Trading volume; Bond Interest Rates
