Ratchet vs Blase Investors and Asset Markets

39 Pages Posted: 6 May 2004

See all articles by Pascal St-Amour

Pascal St-Amour

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Swiss Finance Institute

Date Written: February 2004

Abstract

This paper proposes a new wealth-dependent utility function for the inter-temporal consumption and portfolio problem, in which the reference (bliss) consumption level is a function of wealth. Ratchet effects obtain when higher wealth increases the reference consumption level; blase behavior occurs when higher wealth reduces it. We have three contributions: (i) we identify closed-form solutions for optimal consumption and portfolio rules; (ii) we use the optimal rules to estimate the model using aggregate portfolio data, and (iii) we derive and discuss the pricing implications of our results. Our estimates are consistent with blase behavior and counter-cyclical risk aversion.

Keywords: Asset pricing, Portfolio Choice, Equity premium, Risk-free rate, Predictability, Wealth-dependent preferences, Preference for Status, Reference Consumption Levels

JEL Classification: G11, G12

Suggested Citation

St-Amour, Pascal, Ratchet vs Blase Investors and Asset Markets (February 2004). EFMA 2004 Basel Meetings Paper. Available at SSRN: https://ssrn.com/abstract=480101 or http://dx.doi.org/10.2139/ssrn.480101

Pascal St-Amour (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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