@article {Sheikh9, author = {Abdullah Z. Sheikh and Jianxiong Sun}, title = {Defending the {\textquotedblleft}Endowment Model{\textquotedblright}: Quantifying Liquidity Risk in a Post{\textendash}Credit Crisis World }, volume = {14}, number = {4}, pages = {9--24}, year = {2012}, doi = {10.3905/jai.2012.14.4.009}, publisher = {Institutional Investor Journals Umbrella}, abstract = {This article sets forth the proposition that liquidity risk may be optimized in an attempt to forestall or minimize the impact of a liquidity crisis. For a generic (but typical) endowment asset allocation, the authors find that liquidity levels between 6\% and 14\% are optimal, all other things equal, because 95\% of the time, an allocation in this range would obviate situations in which a portfolio{\textquoteright}s payout rate exceeds its liquidity pool. The framework also provides insights for tail-risk events involving a particularly severe liquidity crisis. For a generic endowment portfolio, the analysis indicates that in order to reduce the severity of a liquidity crisis to zero (i.e., eliminate risk completely), the allocation to fixed income would have to be around 35\% (close to seven times the payout rate of 5\%). Such an allocation would entail a very significant opportunity cost in terms of forgone returns based solely on a desire to mitigate extreme liquidity events (the proverbial {\textquotedblleft}100-year flood{\textquotedblright}). In the authors{\textquoteright} view, reducing the likelihood of a liquidity crisis to below 5\%, may be undesirable for all but the most risk-averse and least returnsensitive endowments.TOPICS: Foundations \& endowments, real assets/alternative investments/private equity, risk management, portfolio construction}, issn = {1520-3255}, URL = {https://jai.pm-research.com/content/14/4/9}, eprint = {https://jai.pm-research.com/content/14/4/9.full.pdf}, journal = {The Journal of Alternative Investments} }