Published online by Cambridge University Press: 29 April 2022
We solve a flexible model that captures transactions costs and infrequencies of trading opportunities for illiquid assets to better understand the shadow costs of illiquidity for different origins of asset illiquidity and heterogeneous investor types. We show that illiquidity that results in suboptimal asset allocation carries low shadow costs, whereas these costs are high when illiquidity restricts consumption. As a result, the shadow costs are high for short-term investors, investors who face substantial liquidity shocks, and investors who desire to allocate a large fraction of their wealth to illiquid assets.
We thank an anonymous referee, Hendrik Bessembinder (the editor), Jules van Binsbergen, Marie Brière, Dirk Broeders, Joost Driessen, Esther Eiling, Frank de Jong, Ralph Koijen, Olivia Mitchell, Theo Nijman, Antoon Pelsser, Patrick Tuijp, seminar participants at Tilburg University, the Wharton School, Maastricht University, Ortec Finance Canada, Ortec Finance Rotterdam, Achmea Investment Management, Robeco, and conference participants of the 2018 Market Microstructure & High Frequency Data Stevanovich Center University of Chicago, 2019 SoFiE, 2018 Netspar Pension Day, and the 2019 International Pension Workshop for very useful comments. Jansen gratefully acknowledges financial support from Instituut Gak. Views expressed are those of the author and do not necessarily reflect official positions of De Nederlandsche Bank.