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Portfolio Choice in the Presence of Personal Illiquid Projects

Authors

  • Miquel Faig,

  • Pauline Shum

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    • Faig is from the University of Toronto, and Shum is from York University. We thank an anonymous referee, the editor Richard Green, and seminar participants at the University of Toronto, York University, University of Autonoma of Barcelona, and the 2000 Canadian Macroeconomics Study Group for their valuable comments.

ABSTRACT

Personal projects, such as a private business or the purchase of a home, influence individuals portfolio choice. We conduct a theoretical analysis of this influence when financial assets are required to provide liquidity to personal projects. Due to this liquidity consideration, individuals behave in a more riskaverse fashion when there is a large penalty for discontinuing or underinvesting in the final stages of the projects. In addition, using data from the 1995 Survey of Consumer Finances, we find that households that are saving to invest in their own businesses or in their own homes indeed have significantly safer financial portfolios.

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