Econometrica Vol. 61 No. 1 1993
Optimal Consumption and Portfolio Rules with Durability and Local Substitution
open access
Abstract
A model of optimal consumption and portfolio choice that captures the notions of local substitution and irreversible purchases of durable goods is studied. Necessary and sufficient conditions for a consumption and portfolio policy to be optimal are provided. A closed-form solution of the optimal consumption and portfolio policy is given. The optimal consumption policy consists of a possible initial "gulp" of consumption, or a period of no consumption, followed.by a process of accumulated consumption with singular sample paths. The equilibrium risk premium in a representative investor economy with a single physical production technology is computed.
- DOI
- 10.2307/2951779
- Volume
- 61
- Issue
- 1
- Pages
- 85
- Sources
- bibtex:phds-export.bib openalex crossref