Portfolio choice with market closure and implications for liquidity premia

Min Dai, Peifan Li, Hong Liu, Yajun Wang

Research output: Journal article publicationJournal articleAcademic researchpeer-review


Most existing portfolio choice models ignore periodic market closure and the fact that market volatility is significantly higher during trading periods. We show that market closure and the volatility difference across trading and nontrading periods significantly change optimal trading strategies and produce a U-shape trading volume pattern that matches empirical evidence. Furthermore, our model implies that transaction costs can have a first order effect on liquidity premia that is largely comparable to empirical findings. Extensive empirical analysis supports the model's unique prediction that stocks with greater return variance variations across trading and nontrading periods require higher liquidity premia.

Original languageEnglish
Pages (from-to)368-386
Number of pages19
JournalManagement Science
Issue number2
Publication statusPublished - Feb 2016


  • Liquidity Premia
  • Market Closure
  • Portfolio Choice
  • Volatility Dynamics

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research


Dive into the research topics of 'Portfolio choice with market closure and implications for liquidity premia'. Together they form a unique fingerprint.

Cite this