Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods

Sanford Grossman and Guy Laroque

No 2369, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze a model of optimal consumption and portfolio selection in which consumption services are generated by holding a durable good. The durable good is illiquid in that a transaction cost must be paid when the good is sold. It is shown that optimal consumption is not a smooth function of wealth; it is optimal for the consumer to wait until a large change in wealth occurs before adjusting his consumption. As a consequence, the consumption based capital asset pricing model fails to hold. Nevertheless, it is shown that the standard, one factor, market portfolio based capital asset pricing model does hold in this environment. It is shown that the optimal durable level is characterized by three numbers (not random variables), say x, y, and z (where x

Date: 1987-08
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Published as Econometrica, vol. 58, no. 1, January 1990, pp. 25-51.

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Working Paper: Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods (2003)
Journal Article: Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods (1990)
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