Saving rates and portfolio choice with subsistence consumption |
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Authors: | Carolina AchurySylwia Hubar Christos Koulovatianos |
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Affiliation: | a Department of Economics, Exeter School of Business, University of Exeter, United Kingdom b School of Economics, University of Nottingham, The Sir Clive Granger Building, Room B48, University Park, PF H32, Nottingham, NG7 2RD, United Kingdom c Centre for Finance and Credit Markets (CFCM), University of Nottingham, United Kingdom d Center for Financial Studies (CFS), Goethe University Frankfurt, Germany |
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Abstract: | We analytically show that a common across rich/poor individuals Stone-Geary utility function with subsistence consumption in the context of a simple two-asset portfolio-choice model is capable of qualitatively and quantitatively explaining: (i) the higher saving rates of the rich, (ii) the higher fraction of personal wealth held in risky assets by the rich, and (iii) the higher volatility of consumption of the wealthier. On the contrary, time-variant “keeping-up-with-the-Joneses” weighted average consumption which plays the role of moving benchmark subsistence consumption gives the same portfolio composition and saving rates across the rich and the poor, failing to reconcile the model with what micro data say. |
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Keywords: | G11 D91 E21 D81 D14 D11 |
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