Consuming durable goods when stock markets jump: A strategic asset allocation approach

• Published in: Journal of economic dynamics & control Vol. 42; pp. 86 - 104
• Main Authors: Amaro de Matos, João, Silva, Nuno
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.05.2014; Elsevier Sequoia S.A
• Subjects: Agency theory; Capital market; Consumption; Decision analysis; Durable consumption goods; Economic dynamics; Economic theory; Financial markets; Investment analysis; Investment policy; Jumps; Management science; Optimal investment; Perishable consumption goods; Personal finance; Securities markets; Stock exchange; Stock exchanges; Strategic asset allocation; Studies; Transaction costs; Optimal investment; Financial markets; G11; Durable consumption goods; Jumps; Strategic asset allocation; Perishable consumption goods
• ISSN: 0165-1889; 1879-1743
• DOI: 10.1016/j.jedc.2014.02.013

In this paper we show the impact of considering jumps in the return process of risky assets when deciding how to invest and consume throughout time. Agents derive their utilities from consumption over time. We consider an agent that invests in the financial market and in durable and perishable consumption goods. Assuming that there are costs for transacting the durable good, we show that an agent who does not consider the possibility of jumps will make suboptimal decisions, not only regarding the fraction of wealth invested in the stock market, but also with respect to the timing for trading on the durable good. Furthermore we also show that jumps cause a non-obvious asymmetric impact on the thresholds that lead the consumer to trade the durable good, even when the jump distribution is symmetric.