Abstract
In this paper a tractable solution is proposed to integrate, to a certain extent, market liquidity risk in the portfolio selection process. It is shown how an investor may take advantage of this additional risk source within the standard mean-variance optimisation framework, by in certain circumstances overcoming the pitfalls of illiquidity and in others seizing a liquidity premium. Bid prices appear effective to capture liquidity risk. The efficient frontier conceived with bid prices consists of mean-variance optimal allocations that cover more liquid stocks (large caps) under stressed market conditions and less liquid stocks (small caps) under normal conditions.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
