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Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods
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
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Cited by
Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S, s) Approach
Caballero, R. J., & Engel, E. M. R. A. (1999) · Econometrica · doi:10.1111/1468-0262.00053 · Cited by 499
Gomes, F., Haliassos, M., & Ramadorai, T. (2021) · Journal of Economic Literature · doi:10.1257/jel.20201461 · Cited by 396
The Spending and Debt Response to Minimum Wage Hikes
Aaronson, D., Agarwal, S., & French, E. (2012) · American Economic Review · doi:10.1257/aer.102.7.3111 · Cited by 235
How Individuals Respond to a Liquidity Shock: Evidence from the 2013 Government Shutdown
Gelman, M., Kariv, S., Shapiro, M., Silverman, D., & Tadelis, S. (2015) · doi:10.3386/w21025 · Cited by 41
Thakral, N., & Tô, L. (2026) · doi:10.2139/ssrn.3756188 · Cited by 17
Metadata
- Authors
- Grossman, S. J., & Laroque, G.
- Venue
- Econometrica
- Publisher
- JSTOR
- Published
- 1990-01
- Volume
- 58
- Issue
- 1
- Pages
- 25
- ISSN
- 0012-9682 (ISSN-L)
- OpenAlex
- W2117338258
- Cited by
- 516
- References
- 0
- FWCI
- 35.12
- Type
- journal article
- Language
- en
- Open access
- closed
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