Optimal Inattention to the Stock Market with Information Costs and Transactions Costs
AbstractRecurrent intervals of inattention to the stock market are optimal if consumers incur a utility cost to observe asset values. When consumers observe the value of their wealth, they decide whether to transfer funds between a transactions account from which consumption must be financed and an investment portfolio of equity and riskless bonds. Transfers of funds are subject to a transactions cost that reduces wealth and consists of two components: one is proportional to the amount of assets transferred, and the other is a fixed resource cost. Because it is costly to transfer funds, the consumer may choose not to transfer any funds on a particular observation date. In general, the optimal adjustment rule---including the size and direction of transfers, and the time of the next observation---is state-dependent. Surprisingly, unless the fixed resource cost of transferring funds is large, the consumer's optimal behavior eventually evolves to a situation with a purely time-dependent rule with a constant interval of time between observations. This interval of time can be substantial even for tiny observation costs. When this situation is attained, the standard consumption Euler equation holds between observation dates if the consumer is sufficiently risk averse.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 102.
Date of creation: 2011
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Other versions of this item:
- Andrew B. Abel & Janice C. Eberly & Stavros Panageas, 2009. "Optimal Inattention to the Stock Market with Information Costs and Transactions Costs," NBER Working Papers 15010, National Bureau of Economic Research, Inc.
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Francis Breedon & Angelo Ranaldo, 2013.
"Intraday Patterns in FX Returns and Order Flow,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 45(5), pages 953-965, 08.
- Francis Breedon & Angelo Ranaldo, 2011. "Intraday patterns in FX returns and order flow," Working Papers 2011-04, Swiss National Bank.
- Francis Breedon & Angelo Ranaldo, 2012. "Intraday Patterns in FX Returns and Order Flow," Working Papers 694, Queen Mary, University of London, School of Economics and Finance.
- Jonathan Huntley & Valentina Michelangeli, 2014. "Can Tax Rebates Stimulate Consumption Spending in a Life-Cycle Model?," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(1), pages 162-89, January.
- Xavier Gabaix, 2011. "A Sparsity-Based Model of Bounded Rationality," NBER Working Papers 16911, National Bureau of Economic Research, Inc.
- Luigi Guiso & Paolo Sodini, 2012.
"Household Finance. An Emerging Field,"
EIEF Working Papers Series
1204, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2012.
- Luo, Yulei & Young, Eric, 2013. "Long-run Consumption Risk and Asset Allocation under Recursive Utility and Rational Inattention," MPRA Paper 52904, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.