Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2022-03-30
Number: 22-028/VI
Author-Name: Daniel Dimitrov
Author-Workplace-Name: University of Amsterdam
Title: Intergenerational Risk Sharing with Market Liquidity Risk
Abstract: This paper examines the optimal allocation of risk across generations whose savings mix is subject to illiquidity in the form of uncertain trading costs. We use a stylised two-period OLG framework, where each generation makes a portfolio allocation decision for retirement, and show that illiquidity reduces the range of transferable shocks between generations and thus lowers the benefits of risk-sharing. Higher illiquidity then may justify higher levels of risk sharing to compensate for the trading friction. We still find that a contingent transfers policy based on a reasonably parametrised savings portfolio with liquid and illiquid assets increased aggregate welfare. 
Classification-JEL: G11, G23, E21, H55
Keywords: intergenerational risk sharing, (il)liquidity, stochastic overlapping generations, funded pension plan
File-URL: https://papers.tinbergen.nl/22028.pdf
File-Format: application/pdf
File-Size: 1,386,797 bytes
Handle: RePEc:tin:wpaper:20220028