Intertemporal consumption choices, transaction costs and limited participation in financial markets: reconciling data and theory

Orazio Attanasio and Monica Paiella

Journal of Applied Econometrics, 2011, vol. 26, issue 2, 322-343

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 Consumption Capital Asset Pricing Model's 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. Using the US Consumer Expenditure Survey and assuming isoelastic preferences, we estimate the coefficient of relative risk aversion at 1.7 and a cost bound of 0.4% 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. Copyright (C) 2010 John Wiley & Sons, Ltd.

Date: 2011
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http://hdl.handle.net/10.1002/jae.1154

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 in Financial Markets: Reconciling Data and Theory (2007)
Working Paper: Intertemporal Consumption Choices, Transaction Costs and Limited Participation to Financial Markets: Reconciling Data and Theory (2006)
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