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Intertemporal consumption choices, transaction costs and limited participation to financial markets: reconciling data and theory

Attanasio, O.; Paiella, M.; (2006) Intertemporal consumption choices, transaction costs and limited participation to financial markets: reconciling data and theory. (NBER Working Papers 12412). National Bureau of Economic Research: Cambridge, US. Green open access

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Abstract

This paper builds a unifying framework that, within the theory of intertemporal consumption choices, brings together the limited participation -based explanation of the poor empirical performance of the C-CAPM and the transaction costs-based explanation of incomplete portfolios. Using the implications of the consumption model and observed household consumption and portfolio choices, we identify the preference parameters of interest and a lower bound for the costs rationalizing non-participation in financial markets, in the presence of unobserved heterogeneity in tastes for consumption and portfolio allocation. Using the US Consumer Expenditure Survey and assuming isoelastic preferences, we estimate the coefficient of relative risk aversion at 1.7 and a cost bound of 0.4 percent of non-durable consumption. Our estimate of the preference parameter is theoretically plausible and the bound sufficiently small to be likely to be exceeded by the actual total (observable and unobservable) costs of participating to financial markets.

Type: Working / discussion paper
Title: Intertemporal consumption choices, transaction costs and limited participation to financial markets: reconciling data and theory
Open access status: An open access version is available from UCL Discovery
Publisher version: http://www.nber.org/papers/w12412
Language: English
Keywords: JEL classification: G11, G12
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/15150
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