A common vehicle for today's owners of illiquid assets
is a limited liability company or some similar arrangement.
As such, those who are aware of their self-control problems, referred to as "sophisticates," are more likely to utilize illiquid asset
This is because the latter option requires holding large balances of cash and foregoing the high return on the illiquid asset
(and, therefore, the associated higher level of long-run consumption).
Rebalancing is rarely an option for illiquid asset
classes such as private equity, but using "vintage accounts" to hold illiquid assets
yields tax compliance savings that are similar to those for side pockets.
An illiquid asset
with high illiquidity costs is characterized by a
Transactions with illiquid assets
do not occur in an equilibrium market, and the application of CAPM in such situations can only be justified using the uncharacteristic assumption that the parties transacting in the illiquid asset
being valued have a practice of composing their investment portfolios mostly out of financial titles.
We model the mid-prices of the liquid and the illiquid asset
as geometric Brownian motions.
A risk-averse investor prefers this smoother pattern of returns; holding the illiquid asset
is risky because it delivers a low amount when liquidated early, on date 1.
To be eligible for this relief, the illiquid asset
must have been acquired under one of the following circumstances:
We label this model SIM-2, since it extends the standard incomplete-markets (SIM) life-cycle economy by adding a second illiquid asset
that pays a higher return--through both a financial component and a housing services component--but is subject to a transaction cost.
The outlook for this sector deteriorated rapidly in the second half of last year, with the sharp fall in local equity prices, exposure to illiquid asset
classes and reliance on short-term borrowing.
Unless you are convinced you can get a substantially higher return off the illiquid asset
of private real estate, you should own it publicly, because it is much more risky to own it without liquidity.