Liquidity-constrained portfolio model and empirical analysis

One of the assumptions is that market is perfect in traditional Markowitz´s portfolio selection model. But it is inconsistent with reality. So we relax its assumptions by adding liquidity factors to study investors´ portfolio choice. We perform empirical analysis based on China A-shares markets. These results show that there is a notable difference in portfolio choice behavior after adding liquidity factors. In imperfect markets, investors must develop choice between returns, volatility and liquidity. If higher liquidity was required, this behavior will lead to lower risk and lower expected returns. And there exits higher risk and higher expected returns, and vice versa.