Intertemporal Consumption Choices, Transaction Costs and Limited Participation to Financial Markets: Reconciling Data and Theory

25 Pages Posted: 13 Aug 2006 Last revised: 2 Jun 2021

See all articles by Orazio Attanasio

Orazio Attanasio

University College London - Department of Economics; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Monica Paiella

University of Naples Federico II

Date Written: August 2006

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.

Suggested Citation

Attanasio, Orazio and Paiella, Monica, Intertemporal Consumption Choices, Transaction Costs and Limited Participation to Financial Markets: Reconciling Data and Theory (August 2006). NBER Working Paper No. w12412, Available at SSRN: https://ssrn.com/abstract=923064

Orazio Attanasio (Contact Author)

University College London - Department of Economics ( email )

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Institute for Fiscal Studies (IFS)

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Monica Paiella

University of Naples Federico II ( email )

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80133 Naples, Caserta 80133
Italy

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