Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods
We 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. As a consequence, the consumption based capital asset pricing model fails to hold. Nevertheless, it is shown that the standard, one factor, market portfolio based capital asset pricing model does hold in this environment. It is shown that the optimal durable level is characterized by three numbers (not random variables), say x, y, and z (where x
(This abstract was borrowed from another version of this item.)
References listed on IDEAS
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.:
- 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.
- Grossman, S J & Melino, Angelo & Shiller, Robert J, 1987. "Estimating the Continuous-Time Consumption-Based Asset-Pricing Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(3), pages 315-327, July.
- Constantinides, George M, 1986.
"Capital Market Equilibrium with Transaction Costs,"
Journal of Political Economy,
University of Chicago Press, vol. 94(4), pages 842-862, August.
- 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.
- Bernanke, Ben, 1985.
"Adjustment costs, durables, and aggregate consumption,"
Journal of Monetary Economics,
Elsevier, vol. 15(1), pages 41-68, January.
- Ben S. Bernanke, 1982. "Adjustment Costs, Durables, and Aggregate Consumption," NBER Working Papers 1038, National Bureau of Economic Research, Inc.
- Eichenbaum, Martin & Hansen, Lars Peter, 1990.
"Estimating Models with Intertemporal Substitution Using Aggregate Time Series Data,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 8(1), pages 53-69, January.
- Martin S. Eichenbaum & Lars Peter Hansen, 1987. "Estimating Models with Intertemporal Substitution Using Aggregate Time Series Data," NBER Working Papers 2181, National Bureau of Economic Research, Inc.
- 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 249-265, April.
- repec:adr:anecst:y:1988:i:9:p:04 is not listed on IDEAS
- 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 247-257, August.
- N. Gregory Mankiw & Matthew D. Shapiro, 1984. "Risk and Return: Consumption versus Market Beta," NBER Working Papers 1399, National Bureau of Economic Research, Inc.
- 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.
- J. S. Flemming, 1969. "The Utility of Wealth and the Utility of Windfalls," Review of Economic Studies, Oxford University Press, vol. 36(1), pages 55-66.
When requesting a correction, please mention this item's handle: RePEc:cla:levarc:618897000000000803. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David K. Levine)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.