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Managing liquidity with portfolio staleness

Author

Listed:
  • Giuseppe Buccheri

    (Universitá degli Studi di Roma Tor Vergata)

  • Davide Pirino

    (Universitá degli Studi di Roma Tor Vergata)

  • Luca Trapin

    (Universitá di Bologna)

Abstract

Liquidity is a risk factor of primary relevance that can significantly affect the asset allocation decisions of investors. In this paper, we introduce the concept of portfolio staleness and propose a simple framework to manage portfolio liquidity, intended as the cost needed to liquidate the portfolio. Within this framework, the traditional minimum variance problem is solved under the additional constraint that portfolio staleness must be smaller than a given threshold. We show that a dynamic asset allocation strategy based on the staleness constrained portfolio can significantly enhance portfolio liquidity over the standard minimum variance solution. Meanwhile, the increase in portfolio risk is limited, generating large liquidity gains per unit of risk.

Suggested Citation

  • Giuseppe Buccheri & Davide Pirino & Luca Trapin, 2021. "Managing liquidity with portfolio staleness," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(1), pages 215-239, June.
    • Handle: RePEc:spr:decfin:v:44:y:2021:i:1:d:10.1007_s10203-020-00300-z
    DOI: 10.1007/s10203-020-00300-z
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    References listed on IDEAS

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    2. Li, Jian & He, Zhou & Wang, Shouyang, 2022. "A survey of supply chain operation and finance with Fintech: Research framework and managerial insights," International Journal of Production Economics, Elsevier, vol. 247(C).

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    More about this item

    Keywords

    Portfolio liquidity; Investments; Price staleness; HAR;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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