Michaelides, Alexander (2001) Portfolio choice, liquidity constraints and stock market mean reversion. . Centre for Economic Policy Research (Great Britain), London, UK.
Full text not available from this repository.Abstract
This Paper solves numerically for the optimal consumption and portfolio choice of an infinitely lived investor facing short sales and borrowing constraints, undiversifiable labour income risk and a predictable time varying equity premium. The investor aggressively times the market while positive correlation between permanent earnings shocks and stock return innovations generates a substantial hedging demand for the riskless asset. Moreover, a speculative increase in savings arises when stock returns are expected to be high and conversely when future returns are expected to be low. Small information/optimization costs can make it optimal for an investor to assume i.i.d excess stock returns, both because liquidity constraints can be frequently binding and because households can smooth idiosyncratic earnings shock using a small buffer stock of wealth.
| Item Type: | Monograph (Discussion Paper) |
|---|---|
| Official URL: | http://www.cepr.org |
| Additional Information: | © 2001 Alex Michaelides |
| Divisions: | Financial Markets Group Economics |
| Subjects: | H Social Sciences > HG Finance |
| JEL classification: | G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth |
| Date Deposited: | 04 Jun 2008 16:52 |
| Last Modified: | 11 Dec 2024 18:30 |
| URI: | http://eprints.lse.ac.uk/id/eprint/5366 |
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