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Untangling Illiquidity: Optimal Asset Allocation with Private Asset Classes

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  • Daniel Dimitrov

Abstract

This paper examines the asset allocation problem faced by long-term investors seeking exposure to illiquid private assets. Liquidity uncertainty hampers continuous rebalancing and withdrawals, while illiquidity risk premia can lead to unintended overallocation during extended periods of asset lock-ups, increasing the variability of portfolio consumption and shrinking investor welfare. Using a dynamic allocation model calibrated on analyst-based capital market expectations, I find that while adding private assets to the investment universe may offer benefits, ignoring illiquidity in the portfolio construction process leads to substantial welfare losses.

Suggested Citation

  • Daniel Dimitrov, 2025. "Untangling Illiquidity: Optimal Asset Allocation with Private Asset Classes," Working Papers 827, DNB.
    • Handle: RePEc:dnb:dnbwpp:827
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    More about this item

    Keywords

    asset allocation; (il)liquidity; private assets; model misspecification;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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