Mitigating portfolio risks: The equilibrium effects of non-tradable assets on optimal policy portfolios
image: Josef Zechner is Senior Professor of Finance and Investments at WU (Vienna University of Economics and Business) and speaker of the PhD program Vienna Graduate School of Finance (VGSF). Before joining the WU, he was Professor of Finance at the University of Vienna and at the University of British Columbia, Canada.
His research covers a broad range of topics in the areas of corporate finance, banking and asset management and is published in leading finance and economics journals such as the Journal of Finance, the Journal of Financial Economics, the Journal of Political Economy and the Review of Financial Studies.
He is currently chair and past president of the European Finance Association (EFA), the German Finance Association (DGF), the Western Finance Association (WFA) and Vice President of the Society for Financial Studies (SFS). He was Managing Editor of the Review of Finance (joint with Marco Pagano) from 2003 to 2012. He is also fellow of the Finance Theory Group and was a member of the Advisory Scientific Committee (ASC) of the European Systemic Risk Board (ESRB) of the European Central Bank (ECB) until 2009. He is also a Research Fellow of the Centre for Economic Policy Research (CEPR).
Prof. Zechner has consulted for various financial institutions. He is also a founding partner and a member of the scientific board of IQAM Invest, an Austrian Asset Management Company.
Credit: Otto Randl, Arne Westerkamp, and Josef Zechner
In this groundbreaking study, the authors embark on a journey into the intricate realm of non-tradable assets and their profound influence on optimal policy portfolios. They meticulously dissect the equilibrium effects of these assets on the asset allocation decisions of investors—those privileged with access and those without.
Through an in-depth theoretical analysis, the authors meticulously construct a model that encompasses both tradable and non-tradable asset classes, each endowed with jointly normally distributed cash flows. Two distinct groups of investors take the stage: those who have the privilege of non-tradable assets and those who do not. All investors share constant absolute risk aversion preferences. The authors astutely derive closed-form solutions for optimal investor demand and equilibrium asset prices, even calibrating their model with US data spanning listed equity, bonds, and private equity. Moreover, they unravel the intricacies of quantities and prices in response to key parameters.
This study, published in the journal China Finance Review International, is nothing short of remarkable. The presence of non-tradable assets significantly reshapes optimal asset allocation strategies. Investors holding non-tradable assets tend to fine-tune their portfolios of tradable assets, gravitating away from those assets correlated with non-tradable assets exhibiting positive betas.
This study holds pivotal significance for not only investors who possess non-tradable assets, such as private equity but also for those yet to access them. It underscores a crucial point—ignoring the impact of non-tradable assets when reverse-engineering risk premia from asset covariances and market capitalizations may inadvertently lead to an underestimation of the equity risk premium.
With this comprehensive analysis, the authors shed a bright light on the equilibrium effects of non-tradability within optimal policy portfolios, in a manner that transcends the exploration of market imperfections influencing individual portfolio choices.
To sum it up, this paper offers an exceptional perspective on portfolio choices and equilibrium prices. It unveils the intricate world of non-tradable assets and their far-reaching influence across the financial landscape. Dive into this thought-provoking research today—read the full article on CFRI!