The Endowment Model and Modern Portfolio Theory / Stephen G. Dimmock, Neng Wang, Jinqiang Yang.

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Dimmock, Stephen G

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w25559.Publication details: Cambridge, Mass. National Bureau of Economic Research 2019.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We develop a dynamic portfolio-choice model with illiquid alternative assets to analyze the "endowment model," popularized by university endowment funds. The alternative asset has a lock-up, but can be liquidated prior to the lock-up's expiration by paying a proportional cost. The quantitative results match the average level and cross-sectional variation of endowments' spending and asset allocation decisions. Asset allocation and spending depend on the alternative asset's expected excess return, unspanned risk, and preferences for inter-temporal smoothing. We extend the model to allow crisis states, and show that increased illiquidity during crises causes holdings to deviate significantly from targets allocations.

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February 2019.

We develop a dynamic portfolio-choice model with illiquid alternative assets to analyze the "endowment model," popularized by university endowment funds. The alternative asset has a lock-up, but can be liquidated prior to the lock-up's expiration by paying a proportional cost. The quantitative results match the average level and cross-sectional variation of endowments' spending and asset allocation decisions. Asset allocation and spending depend on the alternative asset's expected excess return, unspanned risk, and preferences for inter-temporal smoothing. We extend the model to allow crisis states, and show that increased illiquidity during crises causes holdings to deviate significantly from targets allocations.