IDEAS home Printed from https://ideas.repec.org/p/not/notcfc/10-01.html
   My bibliography  Save this paper

Saving Rates and Portfolio Choice with Subsistence Consumption

Author

Listed:
  • Carolina Achury
  • Sylwia Hubar
  • Christos Koulovatianos

Abstract

We analytically show that a common across rich/poor individuals Stone-Geary utility function with subsistence consumption in the context of a simple two-asset portfolio-choice model is capable of qualitatively explaining: (i) the higher saving rates of the rich, (ii) the higher fraction of personal wealth held in stocks by the rich, and (iii) the higher volatility of consumption of the wealthier. On the contrary, time-variant .keeping-up with the Joneses. weighted average consumption playing the role of moving benchmark subsistence consumption gives the same portfolio composition and saving rates across the rich and the poor, failing to reconcile the model with what micro data say.

Suggested Citation

  • Carolina Achury & Sylwia Hubar & Christos Koulovatianos, "undated". "Saving Rates and Portfolio Choice with Subsistence Consumption," Discussion Papers 10/01, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  • Handle: RePEc:not:notcfc:10/01
    as

    Download full text from publisher

    File URL: http://www.nottingham.ac.uk/cfcm/documents/papers/10-01.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Carsten SCHRÖDER & Christos KOULOVATIANOS & Ulrich SCHMIDT, "undated". "Family-type Subistence Incomes," EcoMod2008 23800128, EcoMod.
    2. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
    3. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    4. Richard Blundell & Martin Browning & Costas Meghir, 1994. "Consumer Demand and the Life-Cycle Allocation of Household Expenditures," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 57-80.
    5. Francisco Gomes & Alexander Michaelides, 2003. "Portfolio Choice With Internal Habit Formation: A Life-Cycle Model With Uninsurable Labor Income Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 729-766, October.
    6. Yeung Lewis Chan & Leonid Kogan, 2002. "Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1255-1285, December.
    7. De Graeve, Ferre & Dossche, Maarten & Emiris, Marina & Sneessens, Henri & Wouters, Raf, 2010. "Risk premiums and macroeconomic dynamics in a heterogeneous agent model," Journal of Economic Dynamics and Control, Elsevier, pages 1680-1699.
    8. Charles Grant & Christos Koulovatianos & Alexander Michaelides & Mario Padula, 2010. "Evidence on the Insurance Effect of Redistributive Taxation," The Review of Economics and Statistics, MIT Press, pages 965-973.
    9. Hyeng Keun Koo, 1998. "Consumption and Portfolio Selection with Labor Income: A Continuous Time Approach," Mathematical Finance, Wiley Blackwell, vol. 8(1), pages 49-65.
    10. Michael Haliassos & Alexander Michaelides, 2003. "Portfolio Choice and Liquidity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 143-177, February.
    11. Christos Koulovatianos, 2005. "Preferences and the Dynamic Representative Consumer," Vienna Economics Papers 0505, University of Vienna, Department of Economics.
    12. Sethi, Suresh P. & Taksar, Michael I. & Presman, Ernst L., 1992. "Explicit solution of a general consumption/portfolio problem with subsistence consumption and bankruptcy," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 747-768.
    13. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    14. Jaume Ventura & Francesco Caselli, 2000. "A Representative Consumer Theory of Distribution," American Economic Review, American Economic Association, vol. 90(4), pages 909-926, September.
    15. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    16. Fatih Guvenen, 2009. "A Parsimonious Macroeconomic Model for Asset Pricing," Econometrica, Econometric Society, vol. 77(6), pages 1711-1750, November.
    17. Markus K. Brunnermeier & Stefan Nagel, 2008. "Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-evidence on Individuals," American Economic Review, American Economic Association, vol. 98(3), pages 713-736, June.
    18. Donaldson, David & Pendakur, Krishna, 2006. "The Identification of Fixed Costs From Consumer Behavior," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 255-265, July.
    19. Jessica A. Wachter & Motohiro Yogo, 2010. "Why Do Household Portfolio Shares Rise in Wealth?," Review of Financial Studies, Society for Financial Studies, vol. 23(11), pages 3929-3965, November.
    20. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-543, June.
    21. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
    22. Christos Koulovatianos & Polina Minkovski & Carsten Schröder, 2009. "Per-capita income versus household-need adjusted income: a cross-country comparison," Journal of Income Distribution, Journal of Income Distribution, vol. 18(3-4), pages 11-23, September.
    23. Grishchenko, Olesya V., 2010. "Internal vs. external habit formation: The relative importance for asset pricing," Journal of Economics and Business, Elsevier, vol. 62(3), pages 176-194, May.
    24. Wachter, Jessica A., 2006. "A consumption-based model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 79(2), pages 365-399, February.
    25. Henderson, Vicky, 2005. "Explicit solutions to an optimal portfolio choice problem with stochastic income," Journal of Economic Dynamics and Control, Elsevier, vol. 29(7), pages 1237-1266, July.
    26. Christos Koulovatianos & Carsten Schröder & Ulrich Schmidt, 2008. "Confronting the Robinson Crusoe paradigm with household-size heterogeneity," Levine's Working Paper Archive 122247000000002324, David K. Levine.
    27. Chatterjee, Satyajit, 1994. "Transitional dynamics and the distribution of wealth in a neoclassical growth model," Journal of Public Economics, Elsevier, vol. 54(1), pages 97-119, May.
    28. Christopher J. Malloy & Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2009. "Long-Run Stockholder Consumption Risk and Asset Returns," Journal of Finance, American Finance Association, vol. 64(6), pages 2427-2479, December.
    29. Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2004. "Do the Rich Save More?," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 397-444, April.
    30. Duffie, Darrell & Fleming, Wendell & Soner, H. Mete & Zariphopoulou, Thaleia, 1997. "Hedging in incomplete markets with HARA utility," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 753-782, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Erauskin, Iñaki, 2015. "Savings, the size of the net foreign asset position, and the dynamics of current accounts," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 353-370.
    2. Milton Camelo Rincón & Jacobo Campo Robledo, 2016. "Modelo de consumo de vivienda óptimo: estimaciones para Bogotá," REVISTA FACULTAD DE CIENCIAS ECONÓMICAS, UNIVERSIDAD MILITAR NUEVA GRANADA, vol. 25(1), pages 75-93, December.
    3. Levaggi, Rosella & Menoncin, Francesco, 2013. "Optimal dynamic tax evasion," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2157-2167.
    4. Fortin, Ines & Hlouskova, Jaroslava & Tsigaris, Panagiotis, 2016. "The Consumption-Investment Decision of a Prospect Theory Household," Economics Series 322, Institute for Advanced Studies.
    5. Russell Cooper & Guozhong Zhu, 2016. "Household Finance over the Life-Cycle: What does Education Contribute?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 63-89, April.
    6. Ricardo Bebczuk & Leonardo Gasparini & Noelia Garbero & Julian Amendolaggine, 2015. "Understanding the Determinants of Household Saving: Micro Evidence for Latin America," CEDLAS, Working Papers 0189, CEDLAS, Universidad Nacional de La Plata.
    7. repec:eee:mateco:v:70:y:2017:i:c:p:74-89 is not listed on IDEAS
    8. Studer, Sabrina & Falkinger, Josef & Zhao, Yingnan, 2015. "Explaining structural changes towards and within the financial sector," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113004, Verein für Socialpolitik / German Economic Association.
    9. repec:eee:ecolet:v:158:y:2017:i:c:p:30-33 is not listed on IDEAS
    10. repec:eee:reveco:v:50:y:2017:i:c:p:245-260 is not listed on IDEAS

    More about this item

    Keywords

    elasticity of intertemporal substitution; Stone-Geary preferences; two-asset portfolio; household portfolios; wealth inequality; controlled diffusion.;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:not:notcfc:10/01. 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: (Hilary Hughes). General contact details of provider: http://edirc.repec.org/data/cfnotuk.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.