| Article ID | Journal | Published Year | Pages | File Type |
|---|---|---|---|---|
| 958705 | Journal of Empirical Finance | 2008 | 21 Pages |
Abstract
This paper studies the relation between liquidity and optimal portfolio allocations. Given that the portfolio problem of a constant relative risk aversion investor does not have a closed-form solution, we use a nonparametric approach to estimate the optimal allocations. Using a sample of NYSE stocks from 1963–2000, we find that the optimal portfolio weight in small stocks is strongly increasing in liquidity at short daily and weekly horizons. This result is consistent for three different measures of liquidity: price impact, dollar volume, and turnover. However, liquidity does not influence the optimal portfolio choice for large stocks, nor for longer monthly investment horizons.
Keywords
Related Topics
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Economics, Econometrics and Finance
Economics and Econometrics
Authors
Eric Ghysels, João Pedro Pereira,