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Portfolio choice and liquidity constraints

Haliassos, Michael and Michaelides, Alexander (2001) Portfolio choice and liquidity constraints. 2822. Centre for Economic Policy Research, London, UK.

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Identification Number: 2822

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.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.cepr.org
Additional Information: © 2001 Michael Haliassos and Alex Michaelides
Subjects: H Social Sciences > HG Finance
Sets: Collections > Economists Online
Research centres and groups > Financial Markets Group (FMG)
Departments > Economics
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 05 Jun 2008 07:43
Last Modified: 27 Feb 2014 15:36
URI: http://eprints.lse.ac.uk/id/eprint/5373

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