Intergenerational Risk Sharing with Market Liquidity Risk


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 stylized 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 parametrized savings portfolio with liquid and illiquid assets increases aggregate welfare.

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Recommended citation: Dimitrov, Daniel, Intergenerational Risk Sharing with Market Liquidity Risk (March 30, 2022). Tinbergen Institute Discussion Paper 2022-028/V, Available at SSRN: or