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Consumption and portfolio choice under internal multiplicative habit formation
- Source :
- Journal of Financial and Quantitative Analysis, 55(7), 2334-2371. Cambridge University Press
- Publication Year :
- 2020
-
Abstract
- This paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit. We obtain closed-form policies under general utility functionals and stochastic investment opportunities by developing a nontrivial linearization to the budget constraint. This enables us to explicitly characterize how habit formation affects the marginal propensity to consume and optimal stock–bond investments. We also show that in a setting that combines habit formation with Epstein–Zin utility, consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease.
- Subjects :
- SELECTION
DISAPPOINTMENT
Economics and Econometrics
Economics
media_common.quotation_subject
Social Sciences
DECISION-MAKING
01 natural sciences
010104 statistics & probability
RISK-AVERSION
Linearization
PROSPECT-THEORY
Accounting
Business & Economics
0502 economics and business
Econometrics
050207 economics
0101 mathematics
Marginal propensity to consume
Budget constraint
health care economics and organizations
media_common
Consumption (economics)
High rate
05 social sciences
Multiplicative function
Business, Finance
RETURNS
LIFE
ASSET ALLOCATION
DYNAMIC CONSUMPTION
Portfolio
REGRET THEORY
Habit
Finance
Subjects
Details
- Language :
- English
- ISSN :
- 00221090
- Database :
- OpenAIRE
- Journal :
- Journal of Financial and Quantitative Analysis, 55(7), 2334-2371. Cambridge University Press
- Accession number :
- edsair.doi.dedup.....7cd1ca1feade5bd8e9416dca41d3b3bd