Intertemporal Consumption Choices, Transaction Costs and Limited Participation in Financial Markets: Reconciling Data and Theory

Orazio P. Attanasio and Monica Paiella
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Orazio P. Attanasio: University College London

No 620, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research Department

Abstract: This paper builds a unifying framework based on the theory of intertemporal consumption choices that brings together the limited participation-based explanation of the C-CAPM poor empirical performance and the transaction costs-based explanation of incomplete portfolios. Using the implications of the consumption model and observed household consumption and portfolio choices, we identify the preference parameters of interest and a lower bound for the costs rationalizing non-participation in financial markets Assuming isoelastic preferences, we estimate the coefficient of relative risk aversion at 1.7 and a cost bound of 0.4 percent of non-durable consumption. Our estimate of the preference parameter is theoretically plausible and the bound sufficiently small to be likely to be exceeded by the actual total (observable and unobservable) costs of participating in financial markets.

Keywords: limited participation in financial markets; fixed participation costs; Euler equation for consumption. (search for similar items in EconPapers)
JEL-codes: E21 G11 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-mac and nep-upt
Date: Written 2007-04
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Related works:
Working Paper: Intertemporal Consumption Choices, Transaction Costs and Limited Participation in Financial Markets: Reconciling Data and Theory (2008)
Working Paper: Intertemporal Consumption Choices, Transaction Costs and Limited Participation to Financial Markets: Reconciling Data and Theory (2006)
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