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

João Amaro de Matos and Nuno Miguel Barateiro Silva

Journal of Economic Dynamics and Control, 2014, vol. 42, issue C, 86-104

Abstract: In this paper we show the impact of considering jumps in the return process of risky assets when deciding how to invest and consume throughout time. Agents derive their utilities from consumption over time. We consider an agent that invests in the financial market and in durable and perishable consumption goods. Assuming that there are costs for transacting the durable good, we show that an agent who does not consider the possibility of jumps 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. Furthermore we also show that jumps cause a non-obvious asymmetric impact on the thresholds that lead the consumer to trade the durable good, even when the jump distribution is symmetric.

Keywords: Strategic asset allocation; Optimal investment; Jumps; Financial markets; Durable consumption goods; Perishable consumption goods (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:42:y:2014:i:c:p:86-104

DOI: 10.1016/j.jedc.2014.02.013

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