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Intergenerational Risk Sharing with Market Liquidity Risk

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  • Daniel Dimitrov

    (University of Amsterdam)

Abstract

This paper examines the optimal allocation of risk across generations whose savings mix is subject to illiquidity in the form of uncertain trading costs. We use a stylised two-period OLG framework, where each generation makes a portfolio allocation decision for retirement, and show that illiquidity reduces the range of transferable shocks between generations and thus lowers the benefits of risk-sharing. Higher illiquidity then may justify higher levels of risk sharing to compensate for the trading friction. We still find that a contingent transfers policy based on a reasonably parametrised savings portfolio with liquid and illiquid assets increased aggregate welfare.

Suggested Citation

  • Daniel Dimitrov, 2022. "Intergenerational Risk Sharing with Market Liquidity Risk," Tinbergen Institute Discussion Papers 22-028/VI, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20220028
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    File URL: https://papers.tinbergen.nl/22028.pdf
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    More about this item

    Keywords

    intergenerational risk sharing; (il)liquidity; stochastic overlapping generations; funded pension plan;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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