Luis H. R. Alvarez Esteban: Investment and Liquidity under Uncertainty

We design an investment model characterized by liquidity constraints such that the investment option can be exercised only at discrete timings, distributed according to a Poisson process. We show that liquidity constraints reduce the optimal investment threshold. Further, the optimal investment threshold increases monotonically as a function of the intensity of the Poisson process and it approaches the threshold associated with no liquidity constraints as we approach perfect timing flexibility. We also characterize the distortion associated with the liquidity constraint in the form of an explicit illiquidity premium. Finally, we analyze the incentives of the decision maker for liquidity hoarding.