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Optimal asset allocation with fixed-term securities

Author

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  • Desmettre, Sascha
  • Seifried, Frank Thomas

Abstract

We investigate the optimal asset allocation of an investor who can invest in a fixed-term security that is only traded at time 0. Using a generalized martingale approach, we solve the investor׳s optimal portfolio problem, determine the optimal allocation to fixed-term securities, and provide a representation of trading strategies in terms of a liquidity-related derivative. We apply our approach to two benchmark scenarios: fixed-term fixed-rate bank deposits, and unspanned closed-end securities that can only be traded at time 0. We show that both can be key parts of the investor׳s optimal asset mix, and we investigate the dependence of optimal allocations to fixed-term investments, implied liquidity premia and other characteristics on the underlying model parameters.

Suggested Citation

  • Desmettre, Sascha & Seifried, Frank Thomas, 2016. "Optimal asset allocation with fixed-term securities," Journal of Economic Dynamics and Control, Elsevier, vol. 66(C), pages 1-19.
    • Handle: RePEc:eee:dyncon:v:66:y:2016:i:c:p:1-19
    DOI: 10.1016/j.jedc.2016.03.001
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    Citations

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    Cited by:

    1. Marcos Escobar-Anel & Michel Kschonnek & Rudi Zagst, 2022. "Portfolio optimization: not necessarily concave utility and constraints on wealth and allocation," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 95(1), pages 101-140, February.
    2. Chen, Zheng & Li, Zhongfei & Zeng, Yan, 2023. "Portfolio choice with illiquid asset for a loss-averse pension fund investor," Insurance: Mathematics and Economics, Elsevier, vol. 108(C), pages 60-83.
    3. Yevhen Havrylenko & Maria Hinken & Rudi Zagst, 2022. "Risk sharing in equity-linked insurance products: Stackelberg equilibrium between an insurer and a reinsurer," Papers 2203.04053, arXiv.org, revised Oct 2023.

    More about this item

    Keywords

    Optimal portfolio; Fixed-term investment; Bank deposit; Closed-end security; Martingale method;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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