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Asian Review of Financial Research, Vol., No..
pp.1380~1415
pp.1380~1415
Liquidity Crashes and Robust Portfolio Management
Bong-Gyu Jang Department of Industrial and Management Engineering, POSTECH, Republic of Korea,
Seungkyu Lee Department of Industrial and Management Engineering, POSTECH, Republic of Korea,
Seyoung Park Department of Industrial and Management Engineering, POSTECH, Republic of Korea,
We find robust portfolio rules for ambiguity-aversive fund managers in a financial market with transaction costs. The model proposed in this paper permit liquidity premium much bigger than those found by most empirical literature. Using reasonably-calibrated parameters, we find liquidity premium obtained from the model is much bigger, so transaction costs can have a significant effect on investors¡¯ optimal investment behaviors. We also show that a high ambiguity aversion could be an explanation for a puzzling feature during economic crises that liquidity was greatly reduced in the financial market. Our model shows that a fund manager with a higher ambiguity aversion requires much bigger liquidity premium at times of down markets than at times of up markets.
Bong-Gyu Jang
Seungkyu Lee
Seyoung Park
We find robust portfolio rules for ambiguity-aversive fund managers in a financial market with transaction costs. The model proposed in this paper permit liquidity premium much bigger than those found by most empirical literature. Using reasonably-calibrated parameters, we find liquidity premium obtained from the model is much bigger, so transaction costs can have a significant effect on investors¡¯ optimal investment behaviors. We also show that a high ambiguity aversion could be an explanation for a puzzling feature during economic crises that liquidity was greatly reduced in the financial market. Our model shows that a fund manager with a higher ambiguity aversion requires much bigger liquidity premium at times of down markets than at times of up markets.