TY  - JOUR
AU  - Schwartz,Eduardo S.
AU  - Tebaldi,Claudio
TI  - Illiquid Assets and Optimal Portfolio Choice
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12633
PY  - 2006
Y2  - October 2006
UR  - http://www.nber.org/papers/w12633
L1  - http://www.nber.org/papers/w12633.pdf
N1  - Author contact info:
Eduardo S. Schwartz
Anderson Graduate School of Management
UCLA
110 Westwood Plaza
Los Angeles, CA  90095
Tel: 310/825-2873
Fax: 310/825-6384
E-Mail: eduardo.schwartz@anderson.ucla.edu

Claudio Tebaldi
Universita' Bocconi
E-Mail: claudio.tebaldi@unibocconi.it
AB  - The presence of illiquid assets, such as human wealth or a family owned business, complicates the problem of portfolio choice. This paper is concerned with the problem of optimal asset allocation and consumption in a continuous time model when one asset cannot be traded. This illiquid asset, which depends on an uninsurable source of risk, provides a liquid dividend. In the case of human capital we can think about this dividend as labor income. The agent is endowed with a given amount of the illiquid asset and with some liquid wealth which can be allocated in a market where there is a risky and a riskless asset. The main point of the paper is that the optimal allocations to the two liquid assets and consumption will critically depend on the endowment and characteristics of the illiquid asset, in addition to the preferences and to the liquid holdings held by the agent. We provide what we believe to be the first analytical solution to this problem when the agent has power utility of consumption and terminal wealth. We also derive the value that the agent assigns to the illiquid asset. The risk adjusted valuation procedure we develop can be used to value both liquid and illiquid assets, as well as contingent claims on those assets.
ER  -