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

Orazio Attanasio and Monica Paiella

Discussion Papers from D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy

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 per- formance and the transaction costs-based explanation of incomplete portfolios. Using the implications of the consumption model and ob- served household consumption and portfolio choices, we identify the preference parameters of interest and a lower bound for the costs ra- tionalizing non-participation in nancial markets. Using the US Con- sumer Expenditure Survey and assuming isoelastic preferences, we es- timate the coe¢ cient of relative risk aversion at 1.7 and a cost bound of 0.4 percent of non-durable consumption. Our estimate of the pref- erence parameter is theoretically plausible and the bound su¢ ciently small to be likely to be exceeded by the actual total (observable and unobservable) costs of participating in nancial markets.

Keywords: limited participation in financial markets; fi xed participation costs; Euler equation for consumption (search for similar items in EconPapers)
Date: 2008-02-15
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (3)

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Related works:
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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