Location of Repository

Portfolio choice and liquidity constraints

By Michael Haliassos and Alexander Michaelides

Abstract

We study the infinite horizon model of household portfolio choice under liquidity constraints and revisit the portfolio specialization puzzle for impatient consumers with access to riskless and risky assets. We consider a labour income process that allows us to decompose the consumption and portfolio effects of permanent and transitory shocks to labour income and show their interaction with liquidity constraints and their relative importance in producing precautionary effects and the portfolio specialization result. We show why the puzzle has proved robust for a number of model variations attempted in the literature, and argue that positive correlation between earnings shocks and stock returns is unlikely to provide a plausible resolution. We then offer an alternative explanation for observed stock-holding patterns and the slow emergence of an equity culture. Specifically, we find that relatively small, fixed, stock market entry costs are sufficient to deter households from participating in the stock market. Such entry costs could arise, for example, from informational considerations, sign-up fees and investor inertia

Topics: HG Finance
Publisher: Centre for Economic Policy Research
Year: 2001
OAI identifier: oai:eprints.lse.ac.uk:5373
Provided by: LSE Research Online
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://www.cepr.org (external link)
  • http://eprints.lse.ac.uk/5373/ (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.