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Consuming durable goods when stock markets jump: A strategic asset allocation approach

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  • Amaro de Matos, João
  • Silva, Nuno

Abstract

In this paper we show the impact of considering jumps in the return process of risky assets when deciding how to invest and consume throughout time. Agents derive their utilities from consumption over time. We consider an agent that invests in the financial market and in durable and perishable consumption goods. Assuming that there are costs for transacting the durable good, we show that an agent who does not consider the possibility of jumps will make suboptimal decisions, not only regarding the fraction of wealth invested in the stock market, but also with respect to the timing for trading on the durable good. Furthermore we also show that jumps cause a non-obvious asymmetric impact on the thresholds that lead the consumer to trade the durable good, even when the jump distribution is symmetric.

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  • Amaro de Matos, João & Silva, Nuno, 2014. "Consuming durable goods when stock markets jump: A strategic asset allocation approach," Journal of Economic Dynamics and Control, Elsevier, vol. 42(C), pages 86-104.
    • Handle: RePEc:eee:dyncon:v:42:y:2014:i:c:p:86-104
    DOI: 10.1016/j.jedc.2014.02.013
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    Cited by:

    1. Lu, Jin-Ray & Hwang, Chih-Chiang & Liu, Min-Luan & Lin, Chien-Yi, 2016. "An incentive problem of risk balancing in portfolio choices," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 192-200.
    2. Jin Sun & Ryle S. Perera & Pavel V. Shevchenko, 2019. "Optimal Investment-Consumption-Insurance with Durable and Perishable Consumption Goods in a Jump Diffusion Market," Papers 1903.00631, arXiv.org.

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    More about this item

    Keywords

    Strategic asset allocation; Optimal investment; Jumps; Financial markets; Durable consumption goods; Perishable consumption goods;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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