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Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods

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Author Info
Grossman, Sanford J
Laroque, Guy

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Abstract

The authors analyze a model of optimal consumption and portfolio selection in which consumption services are generated by holding a durable good. The durable good is illiquid in that a transaction cost must be paid when the good is sold. It is shown that optimal consumption is not a smooth function of wealth; it is optimal for the consumer to wait until a large change in wealth occurs before adjusting his consumption. Hence, the consumption based capital asset pricing model fails to hold. Nevertheless, the standard, one factor, market portfolio based capital asset pricing model does hold in this environment. Copyright 1990 by The Econometric Society.

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Publisher Info
Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 58 (1990)
Issue (Month): 1 (January)
Pages: 25-51
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Handle: RePEc:ecm:emetrp:v:58:y:1990:i:1:p:25-51

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Martin S. Eichenbaum & Lars Peter Hansen, 1991. "Estimating Models with Intertemporal Substitution Using Aggregate Time Series Data," NBER Working Papers 2181, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Flemming, J S, 1969. "The Utility of Wealth and the Utility of Windfalls," Review of Economic Studies, Blackwell Publishing, vol. 36(105), pages 55-66, January. [Downloadable!] (restricted)
  3. N. Gregory Mankiw & Matthew D. Shapiro, 1987. "Risk and Return: Consumption versus Market Beta," NBER Working Papers 1399, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Ben S. Bernanke, 1982. "Adjustment Costs, Durables, and Aggregate Consumption," NBER Working Papers 1038, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Sanford J. Grossman & Angelo Melino & Robert J. Shiller, 1985. "Estimating the Continuous Time Consumption Based Asset Pricing Model," NBER Working Papers 1643, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April. [Downloadable!] (restricted)
  7. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August. [Downloadable!] (restricted)
  8. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August. [Downloadable!] (restricted)
  9. Avner Bar-Ilan & Alan S. Blinder, 1987. "The Life-Cycle Permanent-Income Model and Consumer Durables," NBER Working Papers 2149, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October. [Downloadable!] (restricted)
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