Consuming durable goods when stock markets jump: a strategic asset allocation approach

João Amaro de Matos and Nuno Silva
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Nuno Silva: Faculty of Economics University of Coimbra and GEMF

No 2012-01, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

Abstract: Agents derive their utilities from consumption over time. In this paper we consider an agent that invests in the financial market and in consumption goods. The agent has an infinite time horizon and a utility that depends on consumption at each point in time, consuming both a durable good and a perishable good. There are costs for transacting the durable good. We show that an agent who does not consider the impact of jumps in the return process of risky assets will make suboptimal decisions, not only regarding the fraction of wealth invested in the stock market, but also with respect to the timing for trading on the durable good.

Keywords: Optimal asset allocation; durable consumption good; transaction costs. (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2012-01
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Published in Journal of Economic Dynamics and Control 42: 86-104, 2014.

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Persistent link: https://EconPapers.repec.org/RePEc:gmf:wpaper:2012-01

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