Topic
Intertemporal consumption
About: Intertemporal consumption is a research topic. Over the lifetime, 387 publications have been published within this topic receiving 16324 citations.
Papers published on a yearly basis
Papers
TL;DR: In this paper, a class of recursive, but not necessarily expected utility, preferences over intertemporal consumption lotteries is developed, which allows risk attitudes to be disentangled from the degree of inter-temporal substitutability, leading to a model of asset returns in which appropriate versions of both the atemporal CAPM and the inter-time consumption-CAPM are nested as special cases.
Abstract: This paper develops a class of recursive, but not necessarily expected utility, preferences over intertemporal consumption lotteries An important feature of these general preferences is that they permit risk attitudes to be disentangled from the degree of intertemporal substitutability Moreover, in an infinite horizon, representative agent context these preference specifications lead to a model of asset returns in which appropriate versions of both the atemporal CAPM and the intertemporal consumption-CAPM are nested as special cases In our general model, systematic risk of an asset is determined by covariance with both the return to the market portfolio and consumption growth, while in each of the existing models only one of these factors plays a role This result is achieved despite the homotheticity of preferences and the separability of consumption and portfolio decisions Two other auxiliary analytical contributions which are of independent interest are the proofs of (i) the existence of recursive intertemporal utility functions, and (ii) the existence of optima to corresponding optimization problems In proving (i), it is necessary to define a suitable domain for utility functions This is achieved by extending the formulation of the space of temporal lotteries in Kreps and Porteus (1978) to an infinite horizon framework A final contribution is the integration into a temporal setting of a broad class of atemporal non-expected utility theories For homogeneous members of the class due to Chew (1985) and Dekel (1986), the corresponding intertemporal asset pricing model is derived
5,012 citations
TL;DR: In this article, the authors show that no variable apart from current consumption should be of any value in predicting future consumption, except real disposable income, which has no predictive power for consumption, but rejected for an index of stock prices.
Abstract: Optimization of the part of consumers is shown to imply that the marginal utility of consumption evolves according to a random walk with trend. To a reasonable approximation, consumption itself should evolve in the same way. In particular, no variable apart from current consumption should be of any value in predicting future consumption. This implication is tested with time-series data for the postwar United States. It is confirmed for real disposable income, which has no predictive power for consumption, but rejected for an index of stock prices. The paper concludes that the evidence supports a modified version of the life cycle--permanent income hypothesis.
3,154 citations
TL;DR: In this article, a production-based asset pricing model is proposed, which is analogous to the standard consumption-based model, but it uses producers and production functions in the place of consumers and utility functions.
Abstract: This paper describes a production-based asset pricing model. It is analogous to the standard consumption-based model, but it uses producers and production functions in the place of consumers and utility functions. The model ties stock returns to investment returns (marginal rates of transformation) which are inferred from investment data via a production function. The production-based model is used to examine forecasts of stock returns by business-cycle related variables and the association of stock returns with subsequent economic activity. THIS PAPER DESCRIBES A production-based asset pricing model. It is analogous to the standard consumption-based model, but it uses producers and production functions in the place of consumers and utility functions. The production-based model is used to explain two links between stock returns and economic fluctuations that have been the focus of much recent empirical research in finance. These are: 1) a number of variables forecast stock returns, including the term premium, the default premium, lagged returns, dividend-price ratios, and investment; and 2) many of the same variables, and stock returns in particular, forecast measures of economic activity such as investment and GNP growth.1 Since the production-based model is explicitly analogous to the consumption-based model, I start with a review of that model's logic. The consumption-based model ties asset returns to marginal rates of substitution which are inferred from consumption data (or state variables presumed to drive consumption) through a utility function. It is derived from the consumer's first order conditions for optimal intertemporal consumption demand. Its
1,310 citations
TL;DR: In this article, the authors explore how the introduction of habit preferences into the simple intertemporal consumption-based capital asset pricing model "solves" the equity premium and risk-free rate puzzles.
1,231 citations
TL;DR: In this article, the authors consider the optimal intertemporal consumption and investment policy of a CARA investor who faces fixed and proportional transaction costs when trading multiple risky assets and show that when asset returns are uncorrelated, the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds, to trade to the corresponding optimal targets.
Abstract: We consider the optimal intertemporal consumption and investment policy of a constant absolute risk aversion (CARA) investor who faces fixed and proportional transaction costs when trading multiple risky assets. We show that when asset returns are uncorrelated, the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds, to trade to the corresponding optimal targets. An extensive analysis suggests that transaction cost is an important factor in affecting trading volume and that it can significantly diminish the importance of stock return predictability as reported in the literature. THIS PAPER STUDIES THE OPTIMAL INTERTEMPORAL CONSUMPTION and investment policy of an investor with a constant absolute risk aversion (CARA) preference and an infinite horizon. The investor can trade in one risk-free asset and n ≥ 1 risky assets. In contrast to the standard setting, the investor faces both fixed and proportional transaction costs in trading any of these risky assets. In the absence of transaction costs and when risky asset prices follow geometric Brownian motions, the optimal investment policy is to keep a constant dollar amount in each risky asset, as shown by Merton (1971). This trading strategy requires continuous trading in all the risky assets. In addition, the optimal consumption is affine in the total wealth. In the presence of transaction costs, however, trading continuously in a risky asset would incur infinite transaction costs. Therefore, risky assets are traded only infrequently in this case. The literature on optimal consumption and investment with multiple risky assets subject to transaction costs is limited. Leland (2000) examines a multiasset investment fund that is subject to transaction costs and capital gains taxes. Under the assumption that the fund has an exogenous target for each risky asset, he develops a relatively simple numerical procedure to compute the no-transaction region. Akian, Menaldi, and Sulem (1996) consider an optimal consumption and investment problem with proportional transaction costs for
374 citations
Related Topics (5)
Performance Metrics
| Year | Papers |
|---|---|
| 2021 | 8 |
| 2020 | 10 |
| 2019 | 11 |
| 2018 | 7 |
| 2017 | 12 |
| 2016 | 22 |