Mark Westerfield

Foster School of Business
University of Washington
Box 353226
Seattle, WA 98195-3226
Tel: 205-543-4567

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: University of Washington

NBER Working Papers and Publications

September 2013Portfolio Choice with Illiquid Assets
with Andrew Ang, Dimitris Papanikolaou: w19436
We present a model of optimal allocation over liquid and illiquid assets, where illiquidity is the restriction that an asset cannot be traded for intervals of uncertain duration. Illiquidity leads to increased and state-dependent risk aversion, and reduces the allocation to both liquid and illiquid risky assets. Uncertainty about the length of the illiquidity interval, as opposed to a deterministic non-trading interval, is a primary determinant of the cost of illiquidity. We allow market liquidity to vary from `normal' periods, when all assets are fully liquid, to 'illiquidity crises,' when some assets can only be traded infrequently. The possibility of a liquidity crisis leads to limited arbitrage in normal times. Investors are willing to forego 2% of their wealth to hedge against illiqui...

Published: “Portfolio Choice with Illiquid Assets,” with Dimitris Papanikolaou and Mark M. Westerfield, 2014, Management Science, 60, 11, 2737-2761. citation courtesy of

July 2009Market Selection
with Leonid Kogan, Stephen Ross, Jiang Wang: w15189
The hypothesis that financial markets punish traders who make relatively inaccurate forecasts and eventually eliminate the effect of their beliefs on prices is of fundamental importance to the standard modeling paradigm in asset pricing. We establish necessary and sufficient conditions for agents making inferior forecasts to survive and to affect prices in the long run in a general setting with minimal restrictions on endowments, beliefs, or utility functions. We show that the market selection hypothesis is valid for economies with bounded endowments or bounded relative risk aversion, but it cannot be substantially generalized to a broader class of models. Instead, survival is determined by a comparison of the forecast errors to risk attitudes. The price impact of inaccurate forecasts is d...

Published: Kogan, Leonid & Ross, Stephen A. & Wang, Jiang & Westerfield, Mark M., 2017. "Market selection," Journal of Economic Theory, Elsevier, vol. 168(C), pages 209-236. citation courtesy of

January 2003The Price Impact and Survival of Irrational Traders
with Leonid Kogan, Stephen Ross, Jiang Wang: w9434
Milton Friedman argued that irrational traders will consistently lose money, won't survive and, therefore, cannot influence long run equilibrium asset prices. Since his work, survival and price influence have been assumed to be the same. Often partial equilibrium analysis has been relied upon to examine the survival of irrational traders and to make inferences on their influence on prices. In this paper, we demonstrate that survival and influence on prices are two independent concepts. The price impact of irrational traders does not rely on their long-run survival and they can have a significant impact on asset prices even when their wealth becomes negligible. In addition, in contrast to a partial equilibrium analysis, general equilibrium considerations matter since the ability of irration...

Published: Kogan, Leonid, Stephen Ross, Jiang Wang, and Mark Westerfield. "The Price Impact and Survival of Irrational Traders", Journal of Finance vol. 61, issue 1, 195-229, 2006. citation courtesy of

NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us