Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods
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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Volume (Year): 58 (1990)
Issue (Month): 1 (January)
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References listed on IDEAS
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- 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.
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- N. Gregory Mankiw & Matthew D. Shapiro, 1984. "Risk and Return: Consumption versus Market Beta," NBER Working Papers 1399, National Bureau of Economic Research, Inc.
- Harrison, J. Michael & Taylor, Allison J., 1978. "Optimal control of a Brownian storage system," Stochastic Processes and their Applications, Elsevier, vol. 6(2), pages 179-194, January.
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