This paper investigates an Epstein-Zin type (1989, 1991) investors' optimal consumption and portfolio choice problem in the presence of transaction costs and liquidation shocks. We model the liquidation shocks as a Poisson process, which enforces the representative investors to liquidate their wealth in an illiquid asset. We calculate an average liquidity premium to transaction cost (LPTC) ratio with the steady state distribution and show that the liquidation shocks can significantly amplify the effect of the transaction costs on the excess rate of return of the illiquid asset. Our further numerical analysis also demonstrates how the level of elasticity of intertemporal substitution, as well as relative risk aversion, affects the investors' optimal trading behavior.
Keywords: stochastic di erential utility, recursive utility, transaction cost, elasticity of intertemporal substitution, wealth shock.
학회소식
공지사항
[2015년 제 2차] Liquidation Shocks and Transaction Costs
작성자 : 관리자
조회수 : 927
게시일 :
2015-06-03