Optimal Consumption and Investment Strategies with a Perishable and an Indivisible Durable Consumption Good

44 Pages Posted: 17 Aug 2000

See all articles by Anders Damgaard

Anders Damgaard

University of Southern Denmark

Claus Munk

Copenhagen Business School

Brian Fuglsbjerg

affiliation not provided to SSRN

Date Written: July 5, 2000

Abstract

We study the consumption and investment choice of an agent in a continuous-time economy with a riskless asset, several risky financial assets, and two consumption goods, namely a perishable and a durable good with an uncertain price evolution. Assuming lognormal prices and a multiplicatively separable, isoelastic utility function, we provide an explicit Merton-type solution for the optimal strategies for the case where the durable (and all other assets) can be traded without transaction costs. For the case where the durable good is indivisible, in the sense that durable trades imply transaction costs proportional to the value of the current durable holdings, we show analytically that the optimal durable trading strategy is characterized by three constants \underline{z} < z* < \overline{z}. As long as the ratio z of the total current wealth to the value of current durable holdings of the investor is in (\underline{z},\overline{z}), it is optimal not to trade the durable. At the boundaries of this interval it is optimal to trade the durable to attain z = z*. The model is used to examine the optimal substitution between perishable and durable consumption and the importance of the durable price uncertainty and the correlation between the price of the durable good and financial asset prices.

JEL Classification: G11, D11, D91, C61

Suggested Citation

Damgaard, Anders and Munk, Claus and Fuglsbjerg, Brian, Optimal Consumption and Investment Strategies with a Perishable and an Indivisible Durable Consumption Good (July 5, 2000). Available at SSRN: https://ssrn.com/abstract=237788 or http://dx.doi.org/10.2139/ssrn.237788

Anders Damgaard (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
Accounting, Finance, and Law
Odense DK-5230
Denmark
+45 6550 2118 (Phone)
+45 65930726 (Fax)

Claus Munk

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/view/clausmunk/home

Brian Fuglsbjerg

affiliation not provided to SSRN

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
171
Abstract Views
1,000
rank
189,543
PlumX Metrics