Working Paper: NBER ID: w12412
Authors: Orazio P. Attanasio; Monica Paiella
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.
Keywords: intertemporal consumption; transaction costs; limited participation; financial markets; CCAPM
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limited participation in financial markets (G19) | poor empirical performance of the CCAPM (D29) |
| transaction costs (D23) | incomplete portfolios (D52) |
| transaction costs (D23) | observed consumption patterns (D12) |
| risk aversion (D81) | consumption choices (D10) |
| costs of participation (J32) | decision to participate in financial markets (G11) |
| transaction costs (D23) | participation decisions (D70) |